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A guarantor loan is a type of personal loan where a second person, known as a guarantor, agrees to repay the loan if the borrower fails to do so. A guarantor provides additional assurance to the lender and may be required when a borrower does not meet the lender's usual eligibility criteria.
A guarantor is typically someone with a stable income and a good credit score, such as a family member or close friend. By agreeing to guarantee the loan, they take on responsibility for the outstanding debt if the borrower cannot make the repayments.
While having a guarantor may help some borrowers access credit, it also creates financial responsibilities and risks for both parties. Understanding these obligations is important before agreeing to become a guarantor
Who is eligible to be a guarantor?
A guarantor is typically over 18 years old and a resident of the country where the loan is being processed. Lenders generally look for guarantors with a strong credit history and sufficient income to cover the loan payments if the borrower defaults.
What happens to the guarantor if the borrower defaults?
If the borrower fails to repay, the lender can hold the guarantor responsible for the outstanding amount. In some cases, this may extend to recovery action against the guarantor's assets, depending on the loan agreement and applicable recovery process.
What are the concerns for the guarantor?
Being a guarantor comes with real financial and credit risks. Here's what to consider before taking on the responsibility:
Impact on your credit score
Since the loan is approved partly based on the guarantor's credit standing, a loan default by the borrower can negatively affect the guarantor's credit history — making it harder for both the borrower and the guarantor to secure loans in the future. Lenders typically look for an applicant credit score of 750 or above; when an applicant falls short, a guarantor with a strong score can help bridge that gap.
Financial burden
If the borrower fails to make repayments, the guarantor becomes responsible for covering them. This can strain the guarantor's own short-term and long-term financial goals.
Understanding the full loan terms
Before agreeing, a guarantor should review the loan amount, interest rate, method of interest calculation, EMI amount, and tenure — having this information upfront helps avoid surprises if repayment issues arise later.
Tip: Only agree to be a guarantor for someone you know and trust.
How guarantors are different from co-signers
Guarantors Vs. Co-Signers
Both a guarantor and a co-signer help a borrower get a loan approved, but they take on different roles and risks.
Guarantor | Co-Signer | |
When they're needed | Borrower has sufficient income but a poor or limited credit history | Borrower doesn't meet the lender's income criteria |
Repayment responsibility | Steps in only if the borrower defaults | Equally responsible for repayment from the start, alongside the borrower |
Claim to the asset | No ownership claim on anything purchased with the loan | Shares ownership of the asset with the borrower |
Get Credit on Your Own Terms
Skip the stress of finding a guarantor and access a personal credit line based on your own eligibility.
FAQs
Does being a guarantor affect your credit score?
Yes. A guarantor's credit profile may be affected if the borrower defaults on the loan. Missed or unpaid repayments can make it more difficult for the guarantor to obtain credit in the future.
Is a guarantor the same as a co-signer?
No. A guarantor typically becomes responsible for repayment when the borrower defaults, while a co-signer generally shares repayment responsibility with the borrower from the beginning. The exact legal obligations depend on the loan agreement and applicable laws.
Does a guarantor have to be a family member?
No. A guarantor does not necessarily have to be a family member. Depending on the lender's requirements, a close friend, relative, or another eligible individual with sufficient income and a good credit history may act as a guarantor.
Can there be more than one guarantor for a loan?
This depends on the lender and the terms of the loan. Some loan arrangements may allow multiple guarantors, while others may require only one. The responsibilities of each guarantor should be clearly stated in the agreement.
Naina Rajgopalan
Naina Rajgopalan has a thing for numbers and a deep fascination to learn about all things finance. She's been money-wise from a young age and has always shared her knowledge and tips with those around her. Being a part of the content team at Freo, a neobank that offers flexible and customised financial products, along with benefits such as insurance on balance, safe & secure banking, and so on, Naina stays updated with the latest of what happens in the banking and fintech industries. She has taken upon herself to share her knowledge with readers across all walks of life to help them manage their finances and budgets better, so they can make better decisions while spending, borrowing, investing and saving.
