Banks grant loans to borrowers, expecting the loan amount to be returned when the loan maturity period is over. To assure this, banks generally require a security against a loan in case the borrower defaults on repayment. Thus a collateral serves as a protection for the lender against a borrower’s default.
On obtaining a loan, you are required to place an asset as a security with the bank. This is called collateral. Collateral may be your house or a car, against which you can takea home loan or a vehicle loan respectively. Your savings and other liquid assets may also be counted as collateral security. Financial assets such as stocks and bonds can also be placed as collaterals, better known as marketable collaterals. Now, if by any chance you skip the repayment schedule or stop making payments, the bank can seize the security. The ownership of the asset is then transferred and the property attached to your bank’s assets. The bank uses a legal process called foreclosure to obtain the asset from the defaulter and chooses to sell the property to get back the principal it lent to you.
When a bank allots a loan to you, it hopes that the loan amount would be repaid. Banks will ensure that there is someone who will be responsible for repaying the loan in case you default. This person who takes up the responsibility of repaying the loan is a guarantor. Thus banks make sure that it will get back the amount it lent out. For example, if you avail for a home loan or a student’s loan, one of your family members must sign in as a guarantor who guarantees to pay back the amount if you don’t.
People or organizations with a weak credit score may only qualify to obtain a loan if they have a guarantor to assure repayment.
Normally, banks prefer someone from the borrower’s family to be the guarantor. But any individual with a good credit score and the willingness to guarantee repayment in case of a default for the borrower may sign as a guarantor. Further, the guarantor must ensure that the loan amount is repaid to the bank.
In general, a guarantor is a person who assures the lender, to pay for the borrower’s debt in case the latter fails to make repayment or defaults on the loan. Banks usually insist on a guarantor to sign the documents while you are availing a loan. To sign as a guarantor, an individual must have a good credit score( Click here to learn more about a good credit score) and thus must present his/her income reports so as to make sure that the guarantor is capable of repaying the loan in case the borrower cannot.
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