Basically a loan guarantor is someone who is legally liable to pay off the loan or the outstanding loan amount, in case if the primary applicant is unable to repay it.
A guarantor can be anyone from your family, friends or colleague. They co- sign the loan application along with the borrower to provide a guaranty to the lender that if in case the borrower is not able to repay the borrowed amount for that ever reason then the guarantor will be asked for the repayments. In first look it seems quite simple that it’s a matter of doing a signature only but the fact is its lot more than a signature. If everything goes well and the borrower does the timely repayments then there is nothing to worry but there can be an unfortunate case of skipping EMIs for more than a moth, here the lender can reach out to the guarantor and ask him for the repayment of outstanding amount. And if the guarantor fails to do so the lenders (banks) have the authority to take legal actions against both the primary borrower and the guarantor too.
Cases for Which Banks ask for a Guarantor
- If the applicant have low CIBIL Score.
- If the loan amount is high.
- If the applicant have advanced age.
- If the applicants profession is risky one where there is no security of fixed income.
- The last thing is in some of the bank it’s a bank policy to provide a guarantor.
Things to Know being a Loan Guarantor
Impact on Credit Score
When one signs a loan agreement as a guarantor for someone else and the loan is defaulted, it reflects on the CIBIL Report of the guarantor as well. After a certain stage along with the primary borrower the credit rating/score of the guarantor will also be affected negatively. The Credit Information Companies (CIC) such as CIBIL and Equifax always keeps a track of the repayment of the loan and if the EMIs are defaulting then along with the primary borrower the credit score of the guarantor also gets affected. If the borrower is prompt and timely regarding his/her payment there will be a good impact on both the borrower’s and guarantor’s credit rating.
Impact on Personal Assets
If you are a guarantor of a loan whose primary borrower is able to repay the borrowed amount (defaulted), in this case the bank will initially try to liquidate the primary borrower’s assets to recover the money. But before doing this the lender will approach you as you were the guarantor for that borrowing. The lenders may ask you to pay off the outstanding amount. In case you are unable to repay the loan the bank can legally seize and liquidate your personal assets like land, property etc. to recover the outstanding amount. You can only survive with this situation when the primary borrower is ready to repay a loan by selling his property.
Impact on the Credibility
It is important fact to know that if you are a guarantor for any loan, then it will be counted on your open lines of credit and therefore your personal eligibility will be hampered. If there is a default in payment your score will take a hit too. However, if situation like this continues and you want to take a loan for yourself you may face difficulty in this because of low credit score. But don’t depend on the primary borrower completely if he/she is a conscientious borrower because their timely repayments will not help your score gain much height.
Arrange for a More than One Guarantor
It is not must to do thing but before signing the agreement as a guarantor you can ask the borrower to arrange one more guarantor, so that your responsibility can be shared.
Be Careful about Clauses
Being a guarantor always be careful with the clauses in the agreement like what will happen to the obligations of a guarantor? Will the relationship between the primary borrower and guarantor change? For example in case of divorce when the partners get separated, or in the case where the primary borrower dies, in these cases this should not automatically be passed onto heirs.
Keep a Track of the Repayments
Always keep a track of the payments regarding the loan for which you are a guarantor. A single default in EMIs can be reflected in your profile too, so be a bit active and take an update regarding the repayments.
After knowing all the things one can say that the role of a guarantor is definitely not one that you should take lightly. It is important for you to know that if you are already to be a loan guarantor, you have very only a few options in case you want to back out at a later date. A lender will allow you to relinquish from your current role which is as a guarantor only in the case if there can be a suitable replacement and the primary borrower should agrees to do so.
So while you may want to help your family and friends in need by being a loan guarantor for them, always remember that being a loan guarantor is a risky thing and hence before agreeing for this you should think twice on a serious note. In case you decide to become so, ensure you read the documents very carefully before signing it to understand the extent of your liability and responsibility.