What is a guarantor’s role in loan?

Applying for a loan proves beneficial when fulfilling financial needs does not impact one’s savings. A lender may ask the borrower to present a loan guarantor during the loan approval process. A guarantor’s role is significant as he guarantees to repay a borrower’s loan if the latter fails to repay it. In this article, we will explain the role and responsibilities of a guarantor.

What is a loan guarantor?

A guarantor takes the responsibility to pay a borrower’s debt if the borrower defaults on the loan payment. Typically, banks seek a loan guarantor if the loan amount is above a certain limit, if the borrower’s income or credit rating barely fulfils the loan requirements, or if there is a long repayment tenure. The guidelines may differ from one bank to another.

Role of a guarantor

The role of a guarantor becomes crucial as it also increases the chances for loan approval for the borrower. As a guarantor, one is required to sign a legally binding agreement, known as a guarantee, that specifies that a borrower will repay the loan within the stipulated tenure. The agreement also mentions that the guarantor would be liable under Section 128 of the Indian Contract Act. As specified in the act, the guarantor would repay the loan, including the interest and penalties associated with the loan, in case the borrower defaults.

Responsibilities of a guarantor

There are financial and non-financial implications that a guarantor must know before providing a guarantee for a loan. The guarantor is equally responsible for paying off the debt; hence, his responsibilities are somewhat similar to those of the principal borrower.

If a borrower defaults on the loan repayment for some reason, the bank or the lending institution has the right to collect the outstanding amount from the guarantor. Thus, a guarantor offers additional security to lenders. For unsecured loans, an additional guarantee from another party provides lenders a way to recover the dues and lower their risks.

In the case of default on loan repayment, lending institutions are entitled to take legal action against borrowers and guarantors. If the borrower cannot repay the loan amount, the court may ask the guarantor to repay the loan. A guarantor’s monthly income and other assets may also be attached to the loan liability.

Thus, banks may specify guidelines on how the financial position of the guarantor should be better than the principal borrower. A guarantor may face legal action and consequences if he/she fails to take responsibility for the loan.

See also: How many home loans can one person have?

Points to note while becoming a guarantor

• Before appearing as a guarantor, one should check the borrower’s creditworthiness. This will help ascertain that the borrower can repay the loan.
• You may want to reconsider being a guarantor for someone else if you are planning to apply for a loan. Your status as a guarantor may influence your credit score. Thus, your eligibility for a loan may also be impacted.
• Analyse why the borrower wants a guarantor, as this will help give you an idea of their credit history. If it is extremely poor, you may have to reconsider the decision to become the guarantor.
• Consider your finances before accepting the role of a guarantor. As the burden of repayment will be upon you in case the borrower defaults, make sure to check if it is within your scope.

Risks of becoming a guarantor

• Being a loan guarantor is a huge responsibility, but it also comes with certain risks. The borrower’s liabilities will become the guarantor’s liabilities. This is bound to affect one’s loan eligibility.
• In case the guarantor fails to repay the loan when the borrower defaults on the payment, banks can take legal action against the guarantor.
• A guarantor may find it difficult to withdraw his name as the loan guarantor unless the borrower finds a new guarantor or pledges collateral for the loan. Moreover, a guarantor may have to go through several approvals to become free from the legal contract.

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