Home » What are the things to consider before becoming a loan guarantor?

What are the things to consider before becoming a loan guarantor?

What are the things to consider before becoming a loan guarantor?

Photo courtesy Inspired images on Pixabay.

It has become easier to avail of loans as compared to a few decades back. Your friend or a relative wants to take a loan. But for that, the bank may require a guarantor and in turn, the friend or the relative will request you to stand as a guarantor. It is up to you to be a guarantor and most people will agree to do this as they don’t wish to spoil their long-term relationship.

Before agreeing to be a loan guarantor you should study all the risks involved so that you don’t fall into any financial trouble yourself. When a person you know approaches you to be a guarantor you should assess their repayment capacity.  Remember that the bank is asking for a guarantor as the loan amount may be high or the income of the person asking for a loan only meets the minimum requirement. The bank, therefore, wants to reduce its risk by asking for a guarantor.

So what would be your liability? This depends on the type of guarantor you are; whether financial or non-financial.  In case you are a financial guarantor you have equal liability for loan repayment. You will have to pay the entire outstanding amount of the borrower in case they default and are unable to pay. For the non-financial guarantor, the bank will get in touch only to know about the borrower and not demand repayment of the outstanding loan.

Once you stand as a guarantor there are bound to be certain effects. If you have to take a loan in the future the amount would be reduced as your borrowing ability gets reduced due to the loan that you have stood guaranteed for. Till the time the loan is repaid by your friend in full, you can’t borrow the maximum amount. As an example let’s assume that you wish to apply for a loan of Rs. 80 lakhs and you are a guarantor for a loan of Rs. 40 lakhs for a friend. In this case, the bank will sanction only Rs 40 lakhs as you are already standing as a guarantor for your friend for a loan of another Rs. 40 lakhs.

The loan will reflect on your credit report. When the debt is high it will be viewed negatively and affect your credit rating. The guarantor details are also reported to the credit rating bureaus. Default by the borrower will definitely impact the credit rating of the borrower and it will not be easy to get a loan in the future. The guarantor will be liable for the outstanding principal loan amount as well as for the interest and other charges. If the banks find chasing the borrower difficult they may target the guarantor. It becomes imperative for the guarantor to study all the risks involved before signing the papers. Talk to the borrower whether a friend or a relative and learn about their outstanding loans and repayments. Check their credit report and if it appears weak don’t agree to stand as a guarantor. In case you want to take any personal or housing loan then too it is wise not to stand as a guarantor as the financial institution would reduce your loan eligibility if you stand as a guarantor for someone. If the borrower defaults in payment then it will affect your credit rating.

Therefore, it is necessary to keep a close watch on the loan repayment activity of the borrower. Check your credit reports at regular intervals as any default will reflect on your credit report too. Be aware of all the clauses of the loan agreement.

Leave a Reply

Your email address will not be published. Required fields are marked *