Most banks and NBFCs in India use credit scores to decide if someone can pay back a loan. Hence, applicants with bad or really poor scores often get turned down for loans or have to pay very high interest rates as compensation. In situations when you need money right away, a poor CIBIL score can feel like a wall. But remember, not all doors are closed. A personal loan with a guarantor can come to your rescue here.
You can still get credit even if your CIBIL score is poor if you have a guarantor, who is someone with strong financial credentials willing to take responsibility for repayment. These kinds of loans are like a bridge that helps you get back on your feet financially and rebuild your credit history.
What Is a Guarantor Personal Loan?
A guarantor personal loan is a loan in which a third party, called the guarantor, agrees to pay back the loan if the main borrower doesn’t. This contract minimises the lender’s risk, which means that people with weak or low credit scores can acquire loans that they might not have been able to get otherwise.
Things you should know about loans with a guarantor:
- A solid CIBIL score (750 or higher), a consistent income, and a history of paying on time are all things that the guarantor should have.
- The borrower and the guarantor are both legally liable. If the borrower doesn’t pay, the guarantor’s credit can also suffer.
- These loans are often used by people who have bad or no credit, are borrowing for the first time, or have skipped payments in the past.
How a Personal Loan with a Guarantor Works
To get a loan with a guarantor, you must do the following:
- Loan Application: Because the credit score is low, the borrower states they need a guarantor for a personal loan.
- Guarantor’s Checks: The lender looks at the guarantor’s CIBIL score, income documentation, and ability to pay back the loan.
- Signing the Agreement: Both the borrower and the guarantor sign the loan agreement, which makes the guarantor just as responsible.
- Loan Disbursal: The loan is given to the borrower once it has been checked. If the borrower doesn’t pay, the guarantor is still responsible for making the payments.
This is excellent for lenders because they have a way to get their money back, and it’s good for borrowers because they can get credit that they wouldn’t have been able to get otherwise.
Types of Personal Loan Guarantors
When you apply for a personal loan with a guarantor, lenders carefully look into the profiles of both the borrower and the guarantor. Banks arrange guarantors into groups based on how much they are responsible for. A guarantor’s level of responsibility can change. It’s important to know the kinds of guarantors since it helps both the borrower and the guarantor understand what they are agreeing to do and how it could affect their money.
You can put guarantors in India into groups based on how much they are responsible for:
- Financial Guarantor: This person is completely responsible for paying back the loan if the borrower doesn’t. Before giving permission, the income and assets of the guarantor are verified.
- Non-Financial (Moral) Guarantor: Provides assurance of the borrower’s credibility but is not directly liable for repayment. These don’t happen as often in formal banking, although they do happen sometimes in informal settings.
- Limited Guarantor: This person promises to pay for a section of the loan or a certain obligation, which limits their liability.
Most banks and NBFCs in India are financial guarantors who have an excellent history of paying back loans because this makes it much less likely that they will default.
Benefits of Taking a Guarantor Personal Loan with a Low CIBIL Score
Increased Chances of Loan Approval
People with bad or limited credit records may find it challenging to get personal loans. The lender is more likely to provide the borrower with the loan if they have a guarantor with a good credit score and a steady job.
Loans with Better Rates and Terms
When the individual who guarantees the loan is likewise responsible for paying it back, the lender’s risk goes down a lot. If you have a guarantor, you could acquire better terms, such as lower interest rates, bigger loans, or longer payback periods.
Opportunity to Rebuild Credit Score
When a borrower pays back a loan with a guarantor, it shows that they are good with their money and demonstrate responsible conduct. People’s CIBIL scores can improve if they keep paying their EMIs on time for a long time. Also, in the future, this can create opportunities to get good loans on their own.
Risks and Duties for the Guarantor
Guarantor loans can help borrowers, but they can also put a lot of pressure on the guarantor:
- Legal Responsibility: If the borrower doesn’t pay, the guarantor is legally responsible for paying the debt.
- Effect on Credit Score: If the borrower or guarantor misses an EMI or defaults, their CIBIL scores will go down.
- Complicated Relationships: In most cases, guarantor agreements are made between close friends or family. A default can cause problems with not just the money involved, but also the relationships.
- Less Credit Capacity: Since guarantor liability is recorded, the guarantor’s ability to take new loans in their own name can be limited or reduced to a great extent.
Eligibility Criteria for Borrower and Guarantor
To get a loan swiftly, the borrower and the person who guarantees it must both meet the following criteria:
Borrower should have:
- Age: 21 to 60 years
- Valid proof of income, like a salary slip/stub or business profits
- Valid Aadhaar, PAN, and an operational bank account
- Can apply even if their CIBIL score is low or not there at all
Guarantor should have:
- A reputable and good CIBIL score (of at least 750)
- A steady income source or job
- A strong record of paying back loans
- Willingness to sign a legal document to take up responsibility
- Not a lot of existing debt or credit in their name
Other Options for Borrowers with a Low CIBIL Score
Not every borrower will be able to find a guarantor who is ready to take on some of the risk. In these situations, other options are:
- Secured Personal Loans: If you offer security like gold, fixed deposits, or property, you may be more likely to get approved without a guarantor.
- Credit Builder Loans: Special loans designed to help borrowers improve their CIBIL score by making regular payments on time.
- Smaller Loans from NBFCs and FinTechs: Many online lenders charge higher interest rates on small loans to people who are new to credit or have bad credit.
- Co-applicant Loans: Applying with a spouse or family member as a co-borrower instead of a guarantor.
- Improving Credit Score: Before applying for a new loan, one should pay off any debts, fix mistakes on credit reports, and build a good history of repayments.
A personal loan with a guarantor might help people with a poor CIBIL score get the money they need. By leveraging the strong credit profile of a guarantor, borrowers not only improve their chances of loan approval but may also access better terms and lower interest rates. But this puts a lot of pressure on the guarantor, whose credit health and ability to borrow in the future could be hurt if the loan is not paid back. The most important thing for borrowers is to be responsible with the loan. Paying it back on time not only gets them financial relief, but it also helps them rebuild their credit for the future.
FAQs
Who can become a guarantor for my personal loan?
Your close family, relatives, or friends whom you may trust are usually your guarantors. The person applying should have a consistent income, a strong record of paying back debts, and a high CIBIL score.
Does the CIBIL score of the guarantor affect whether or not the loan is approved?
Yes. Lenders pay great attention to the guarantor’s credit score and how successfully they have paid back loans in the past. If your guarantor has a good score (typically 750 or higher), your loan is far more likely to get accepted.
Will having a guarantor on a loan help my credit score?
Yes, as long as you pay on time. Credit bureaus know about your regular EMI payments. This can help you slowly raise your CIBIL score and make you feel better about receiving loans in the future.
What documents are required from the guarantor?
Normally, banks ask for KYC documents (Aadhaar and PAN), income proof (salary slips, ITR, or bank records), and sometimes details about employment.
What other options do I have if I can’t find a guarantor?
You might also seek a secured personal loan (backed by gold, FDs, or property), a small loan from an NBFC or FinTech, a co-applicant loan with a family member, or a credit-builder loan product that is meant to help you improve your CIBIL score.
