Personal Finance

Loan guarantor? Know these risk factors

Gaurav Aggarwal | Updated on September 14, 2020 Published on September 13, 2020

The guarantor should ask the loan applicant to opt for loan protection cover

Standing guarantee for a loan is providing a helping hand to someone who is unable to get a loan on their own.

However, it comes with increased liability and financial risk for the guarantor.

Here are some crucial factors that a person should consider before agreeing to be a loan guarantor.

Why a guarantor

Co-borrower(s) of a loan shares the responsibility of making regular repayments with the primary borrower.

Co-borrowers can be usually selected from the list of close relations specified by the lender.

A loan guarantor comes to the scene only when the primary borrower and co-borrower(s), if any, fail to repay the loan.

The guarantor can be anyone beyond the specific relations listed by the lender.

Lenders can ask a prospective borrower to loop in a guarantor when they are unsure or not satisfied with the primary and co-borrower’s eligibility and repayment capacity.

High loan amount, poor credit scores of loan applicants, primary borrower nearing or beyond the cut-off age for applicants, risky job profile or employer profile of the applicants, etc, are some factors that prompt lenders to ask for someone to stand guarantee for loan.

Lenders can ask for guarantors in any type of unsecured and secured loans.

As in the case of primary borrower and co-applicants, the lenders will consider the credit score, income, job profile, repayment capacity, employer profile, etc, of the proposed guarantor while evaluating their eligibility.

Liabilities of guarantor

A loan guarantor is liable for the timely repayment of the guaranteed loan in case the primary borrower and co-borrower(s), if any, fail to do so.

Whenever the default happens, the lender can demand the loan guarantor to step in and repay the outstanding loan amount along with the penal rates and charges incurred due to the non-payment of loan dues.

Hence, those being roped in as guarantors should persuade the primary applicant and co-applicant, if any, to opt for a loan protection insurance plan. This will reduce the liability of the loan guarantors arising from loan default due to unfortunate demise or disability of the primary/co-borrowers.

Remember that these insurance plans do not cover loan default, they only cover the contingency arising out of demise or disability of the primary/co-borrower of the loan.

Credit score, loan eligibility

Any default or delay in the loan repayment by the primary borrower and co-borrower(s) will adversely impact the credit score of the loan guarantor as well. Hence, before accepting the role of a guarantor, one should always make sure that the primary and co-borrowers are financially stable and disciplined to make timely repayments.

Existing guarantors should keep a close tab on the repayment activities in the loans they guaranteed. Alternatively, guarantors can also fetch their credit reports at regular intervals as any delay or default in repayments will reflect in their credit reports as well.

Once a person stands guarantee for a loan, the loan amount they are eligible for gets reduced by the outstanding amount in the guaranteed loan. Lenders consider the outstanding loan amount in the guaranteed loan as contingent liability of the guarantors. Hence, one should always assess one’s probable financing requirements in the short and mid term before committing to standing guarantee for a loan.

The loan guarantor cannot withdraw from their responsibility till the lender and primary and co-borrower(s) find a mutually acceptable new replacement for the original loan guarantor. This is another reason why a loan guarantor should carefully assess their near- and mid-term financing requirements before agreeing to be a guarantor.

The writer is Director, Unsecured Loans,

Follow us on Telegram, Facebook, Twitter, Instagram, YouTube and Linkedin. You can also download our Android App or IOS App.

Published on September 13, 2020
This article is closed for comments.
Please Email the Editor