Important Points to keep in Mind for a Loan Guarantor

Banks and non-banking financial institutions provide loans based on the credit history of the borrower. It is because financial institutions want to ensure that the borrower does not default and repays the loan on time. To get full assurance, the financial institutions may also ask for a loan guarantor.

Thus,if a known-friend of yours has requested to be his/her loan guarantor, then firstly, you must understand that it is not just a social obligation. You assure the bank that the borrower will repay the loan on time without any default. Therefor, if you decide to be a loan guarantor to someone, here are a few things that you must keep in mind.

  1. Understanding the reason for seeking loan guarantor: Before deciding to be a loan guarantor, you must find information about why banks want a guarantor in the first place. Usually, banks ask for a loan guarantor when the credit score of the borrower is not ideal, and the institution wants a full guarantee that he would repay the loan. In other cases, banks allow providing loans than the minimum eligibility of the borrower. Therefore it seeks a loan guarantor.
  2. Knowing the significance of loan guarantor: You should have clarity in mind that a loan guarantor is not a co-borrower and in case the primary borrower does not repay the loan on time, the responsibility to pay the dues lies on a co-borrower. However, in cases when both fail to repay the outstanding dues, banks may approach the loan guarantor.
  3. It can impact your credit score: Banks and non-banking financial institutions allow an individual to become a loan guarantor when he has a sound credit history and repayment capability. They may also check your credit score before agreeing for you to be a loan guarantor. If the primary borrower does not repay any EMI on time, then it will affect your capability to take credit in the future, further hurting your credit score as well.
  4. Banks may also take legal action against you: The primary step when a borrower defaults on his loan is to repay the outstanding loan amount from the borrower. In case of a secured loan, banks may sell the security or mortgage to recover the outstanding amount. However, in case of an unsecured loan, it becomes difficult to recover the amount. Also, in case of the demise of the primary borrower, banks may recover the loan amount from the loan guarantor, and if as a loan guarantor, you refuse to pay the outstanding dues, then it may take a legal against you. Under Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, they may also seize your property to get the loan amount.
  5. You cannot withdraw as a loan guarantor: You must understand all the terms and conditions before agreeing to be a loan guarantor. It is because once you decide to be a loan guarantor, it is difficult to withdraw as a loan guarantor. To withdraw as a loan guarantor, you need to seek permission from the lender as well as the lending institution. They may agree to do so if the primary borrower is able to find an alternate loan guarantor which gets approved by the bank.

Conclusion: A loan guarantor thus financially backs the borrower that he can repay the loan on time, and in case he fails to make the full payment, the responsibility to pay the entire loan amount goes to him. Hence, before agreeing to become a loan guarantor, one should carefully analyse the credibility of the borrower.

Summary:Important points to keep in mind for a loan guarantor

If a known-friend of yours has requested to be his/her loan guarantor, then firstly, you must understand that it is not just a social obligation. You assure the bank that the borrower will repay the loan on time without any default. 

  1. You must find information about why banks want a guarantor in the first place. Usually, banks ask for a loan guarantor when the credit score of the borrower is not ideal.. In other cases, banks allow providing loans than the minimum eligibility of the borrower. 
  2. You should have clarity in mind that a loan guarantor is not a co-borrower and in case the primary borrower does not repay the loan on time, the responsibility to pay the dues lies on a co-borrower. However, in cases when both fail to repay the outstanding dues, banks may approach the loan guarantor.
  3. Banks and non-banking financial institutions allow an individual to become a loan guarantor when he has a sound credit history and repayment capability. If the primary borrower does not repay any EMI on time, then it will affect your credit score as well.
  4. In case of the demise of the primary borrower, banks may recover the loan amount from the loan guarantor, and if as a loan guarantor, you refuse to pay the outstanding dues, then it may take a legal action against you. 
  5. You must understand all the terms and conditions before agreeing to be a loan guarantor. It is because once you decide to be a loan guarantor, it is difficult to withdraw as a loan guarantor.

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