If a close friend requests you to become his/her loan guarantor, will you say “yes”? Some will take a decision after assessing whether that friend is capable of making prompt repayments, or not. Some will reject it outright – not wanting to be part of someone else’s credit responsibilities.
Becoming a guarantor for a loan is quite a big responsibility. It basically means you are providing a ‘guarantee’ to the credit institution, such as banks, that you shall repay the debt of the borrower if he/she fails to do so.
Who is a loan guarantor?
A loan guarantor, acting as a co-signee, pledges his/her own assets or services to the credit institution if a situation arises where the applicant might default in his loan obligations. A guarantor pledges to repay the loan on behalf of the applicant. The guarantor has to furnish his/her details of income as well as information about assets and liabilities. Many banks insist on one or two personal loan guarantors. The guarantors have to meet the norms specified by the banks. A guarantor basically provides a security on behalf of the borrower to the bank.
Eligibility for a loan guarantor
You would be surprised to know that with regards to nomination of guarantors, banks do not have a uniform set of guidelines. Individual banks have the right to decide upon the requirement of the loan guarantor. Each bank has its own policy and usually requires one or two guarantors for higher amounts. For amounts of Rs.5 lakh and upwards, a loan guarantor is required. It also depends on the credit history and repayment capacity of the borrower. Majority of times, the loans that require guarantors are Education loans, Home loans and other loans where the amount is generally very high.
Know the borrower well
A most obvious tip is to know whom you are guaranteeing for. If possible, learn about the borrower’s repayment capacity. Also ensure that you yourself have the repayment capacity – in case the applicant defaults.
Care with documentation
Make sure you read and understand all the terms and conditions mentioned in the loan agreement. Check if the amount is okay, and is mentioned clearly and correctly. Be careful, when providing the lenders details about you, photographs and other self-attested photocopies.
Keep track of repayments
Ensure that you collect the repayment proofs from the borrower. It is good to keep track of all the repayments being made. This will also maintain trust between the borrower and yourself.
Loan Guarantor versus Co-Borrower
A co-borrower is a direct borrower, which means that he/she has the same responsibility as the primary borrower. If the primary borrower defaults and possibly absconds, then the credit institution will pursue the co-borrower who is equally blamed for the entire default. The guarantor is someone who signs the loan contract and agrees to pay in lieu of the borrower or co-borrower, if they fail to satisfy their credit obligations under the loan contract.
In simple terms, the primary borrower and co-borrower hold joint primary responsibility to pay the debt. Whereas, the guarantor has the secondary responsibility towards the borrowed debt. In case of defaults by the primary and co-borrower, the guarantor bears full responsibility of paying-off the entirety of the loan. A co-borrower’s financials and credit score is checked by the institution towards loan eligibility.
Risks for a loan guarantor
A guarantor on any secured loan is equally responsible to ensure the repayment of the loan. In case where your friend, colleague or family member (who availed the loan with you as the guarantor) fails to repay the loan, you have to honor the repayment obligation on their behalf. The information pertaining to the guaranteed loan will appear on the accounts section of your credit report. Therefore, in case of any defaults or late repayments, you will have to get after the borrower and persuade him/her to repay. In case of any financial difficulties faced by the borrower, you will then have to contact the bank to restructure the settlement contract only if the bank agrees for such a restructure.
Your credit score is like your passport for getting credit. In case of applying for an unsecured personal loan with a digital lending platform like Loan Singh, your credit score is the key criteria that can get you the personal loan approved. In case there is a record of a late repayment or a default for a loan wherein you were the guarantor, then Loan Singh will reject your personal loan application just because you were a guarantor for a past default. Your credit information is available with credit bureaus, so don’t be under the illusion that nobody would know what transpired with your credit history.
Getting out as a loan guarantor
Banks usually wait for a few months before issuing a notice to the guarantor in case of defaults. But sometimes, much before the defaults, you might notice irregularities in repayment or the borrower in duress, so you may decide to get out of the loan agreement with the bank as a loan guarantor. In case of defaults, the bank treats you as willful defaulter unless you and your lawyer don’t come-up with a solution.
In case you get to know that the borrower has availed another loan over the original amount that has been sanctioned, without your consent, you can then ask the bank to relive you off as a loan guarantor for the second loan. You will however be liable to repay the outstanding on the original amount that is sanctioned.
You can approach the bank with an application to release you as the guarantor if there is a substitute ready to guarantee. If the bank is convinced with the substitute, then you may be released. Your credit score remains intact as the loan is deemed closed in the records.
Signing as a guarantor allows the bank to hold onto some of your tangible assets. In case of a default, the bank will auction the same to recover the outstanding amount. But suppose your asset is under mortgage or under construction, you can fight your case in court saying it needs to be fully paid for first.
A default will get you a tag of a ‘willful defaulter’ on your credit score. You can also approach the court and argue that when you had signed-up as a guarantor, there were no signs of the borrower defaulting. So, just because the borrower has defaulted now, does not mean you have too.