In case you sign the dotted line to become a guarantor, not only will you be liable to pay off the loan in case of a default, but your own borrowing capacity would reduce and your credit too will come down if the primary borrower defaults.
A loan guarantor is someone who is legally liable to pay off the loan, in case the primary applicant is unable to do so. Unlike in case of a co-borrower, a guarantor does not need to be a close family member of the primary borrower. However, in case you sign the dotted line to become a guarantor, not only will you be liable to pay off the loan in case of a default, but your own borrowing capacity would reduce and your credit, too, will come down if the primary borrower defaults.
When do banks ask for a guarantor?
Banks can ask for a prospective borrower to provide guarantors in different cases. Some of the most common cases are:
• The applicant has a low credit score and poor credit history
• The primary applicant is of an advanced age
• The primary applicant works in a high-risk profession
• The primary applicant belongs to a low income group
• As part of the bank’s policy requirements
The above are just a few reasons why a bank might decide to ask for one or more guarantors and they are applicable to various classes of loans including education loan, home loan, personal loan, etc.
Impact of Being a Guarantor on Your Finances
Being a financial guarantor does have a few key implications for you in case you decide to sign the loan guarantor documents. The following are a few of the leading ones:
Legal Responsibility for the loan: Though being a loan guarantor is not the same as being a co-borrower, from the bank’s perspective, you have equal legal responsibility to pay off the loan. Thus, when signing up as a guarantor, you are required to submit key documents such as income proof, assets and liabilities information etc. The lender utilises these documents to determine if you are eligible to act as a guarantor for the loan in question, which simply means the bank would try and gauge if you have the financial means to pay off the loan in case the primary applicant defaults.
Credit Report Impact: When you sign up as a guarantor of a loan, it will show up on your credit report and therefore impact your credit score in case of a default. What’s more, your eligibility for new loans will also decrease as banks will factor in the loan you have guaranteed when determining your eligibility. Thus you may be denied a loan, offered a loan at a higher rate of interest or for a lower loan amount just because of being the guarantor of an outstanding loan. Moreover, in case you are already a guarantor for one or more outstanding loans, you might not be allowed to act as a guarantor for another.
Impact on Personal Assets: In case you are the guarantor of a loan whose primary borrower has defaulted, the bank will initially try to liquidate the primary borrower’s assets to recover its money. Subsequently, the lender will approach you in the capacity of the guarantor and ask you to pay off the outstanding amount. In case you are unable to service the loan to the bank’s satisfaction for any reason, the bank can legally seize and liquidate your personal assets to recover the balance amount.
Hence, the role of a guarantor is definitely not one that you should take lightly. Remember if you are already a loan guarantor, you have very few options in case you want to back out at a later date. A lender will allow you to relinquish your current role as guarantor only if a suitable replacement can be provided and the primary borrower agrees to the change. So while you may want to help your near and dear ones in need, being a loan guarantor comes at a risk, and hence, should be given a serious thought. In case you decide to become a loan guarantor, ensure you read the documents carefully to understand the extent of your liability before signing the documents.(The writer is CEO& Co-founder, Paisabazaar.com)