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Risks to avoid while signing up as a loan guarantor

The loan guarantor would be held liable for the timely repayment of the guaranteed loan in case the primary borrower of the loan account fails to repay the loan by the due date.

Risks to avoid while signing up as a loan guarantor
Once a person becomes a loan guarantor, he cannot withdraw from this position till the lender and the primary/co-borrower(s) of the guaranteed loan find a mutually acceptable person for becoming the new replacement guarantor.

By Gaurav Aggarwal

Lenders often ask some of their loan applicants to bring in loan guarantors. Lenders usually add this requirement when they are not sure about the repayment capacity of the primary borrowers and co-borrowers. Other situations in which lenders may ask for loan guarantors include inadequate credit score of the primary loan applicants, risky employer profile or job profile, loan amounts exceeding the borrowers’ eligibility, primary borrower nearing or beyond the cut-off age for making the loan application, etc.

Here I will discuss some of the risks associated with becoming a loan guarantor:

Risks of incurring loan repayment liability

Just as in the case of primary applicants and co-applicants, lenders consider the income, job profile, credit score, repayment capacity, employer’s profile, etc of the proposed guarantor while evaluating his candidature. The primary reason is that the loan guarantor would be held liable for the timely repayment of the guaranteed loan in case the primary borrower and co-borrower(s) of the loan account fail to repay the loan by the due dates. In case of a loan default, the lender would ask the guarantor to repay the outstanding loan amount along with the penal rates and other charges incurred due to the non-repayment.

Thus, those planning to become loan guarantors should always persuade the primary applicant and co-applicants to opt for loan protection insurance plans. This would reduce the repayment liability of guarantor caused by the unfortunate demise or disability of the primary/co-borrowers.

Impact on credit score

As the loan guarantors become equally liable for the timely repayment of their guaranteed loans, any delay or default in the loan repayment would adversely impact the credit scores of the guarantors as well. This would impact the future loan and credit card eligibility of the loan guarantor. Thus, one should double check the financial stability and discipline of the primary borrower and co-borrower(s) before becoming their loan guarantor.

One should also ensure to keep a close tab on the repayment activities in the guaranteed loans. Additionally, one should also fetch his credit reports at regular intervals as any delay or default in the loan repayment will reflect in his credit reports as well.

Impact on loan eligibility

The outstanding loan amount of a guaranteed loan is considered as a contingent liability for its guarantor. Thus, once a person becomes a loan guarantor, his loan eligibility would be reduced by the outstanding amount of the guaranteed loan.

Always make sure to assess any future loan requirements if you are planning to guarantee any loan.

Not easy to move out from the role

Once a person becomes a loan guarantor, he cannot withdraw from this position till the lender and the primary/co-borrower(s) of the guaranteed loan find a mutually acceptable person for becoming the new replacement guarantor. This is another reason why one should always carefully assess one’s near and mid-term loan requirements before becoming a loan guarantor.

(The author is Senior Director, Paisabazaar.com)

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