Banks at times ask for a guarantor if the loan amount is above a certain threshold, the applicant’s income level is low or credit score is not satisfactory. Lenders usually ask the borrower to bring a guarantor when they don’t have full confidence in the loan applicant’s ability to repay the loan. Lenders may also require a guarantor if the borrower fails to meet some other specific eligibility criteria.
As a loan guarantor, before the bank does, you should also conduct some unofficial checks on the borrower like assessing whether the individual will be able to repay the loan, creditworthiness, the purpose of the loan, the person’s financial stability, and many other factors. Remember, if the borrower fails to pay the loan in future, the lender will come to you next to get back its money and you will be liable to pay.
Unforeseen events may result in the borrower defaulting on a loan
The borrower, once confident in his ability to repay the loan, might find himself grappling with difficulties in repaying the dues because of factors like job loss, financial trouble, health crisis, and economic downturn. In such situations, despite making the best efforts to stay afloat, the borrower might find himself sinking deeper into debt.
Imagine you are a loan guarantor, and over time, your communication with the borrower becomes infrequent or stops altogether. You don’t know what’s happening in the person’s life or how he is doing financially. Suddenly, one day, you find out that the person has missed payments for several months. You receive a notice from the bank, and you try to reach out to the borrower, but you get no response.
In such a situation, you tend to become more worried due to the lack of communication with the borrower and the fear of what the bank will do next.
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Consequences of being a loan guarantor if the borrower defaults
Adhil Shetty, CEO of BankBazaar, explains how banks or financial institutions respond when a borrower defaults on a loan and its implications for the loan guarantor.
“If a borrower defaults on repayment of a loan, the lender gets in touch with the borrower first to recover the dues. If the borrower is unable to settle the dues, the lender contacts the guarantor to pay off the EMIs and the late fees. If the guarantor fails to pay off the outstanding balance, the bank has the right to liquidate their personal assets such as property to recover the dues,” Shetty says.
As a loan guarantor, your credit score and future loan eligibility are at risk
As a loan guarantor, your credit score can get knocked down if the borrower defaults on the loan, says Shetty, adding that also, when you become a loan guarantor, your eligibility for future loans reduces.
“This is because in case the borrower defaults on the loan, the liability to pay off the dues is shifted from the borrower to the loan guarantor. So before you sign up as a guarantor, you might want to check the financial discipline of the borrower as well as if your future financial commitments, such as if you wish to take any loan in the near future. This is why it’s important that you check your and the borrower’s credit score before you sign up as a guarantor. If either is already at a low, you don’t want to expose yourself to further vulnerability by becoming a loan guarantor.”
Conclusion:
When you agree to be a loan guarantor, you take responsibility that in the event of default on loan by the original borrower you will repay the loan. Remember, if the borrower fails to make payments on time or default completely, it will reflect on your credit history, lower your credit score and make it harder for you to secure loans in future. In essence, becoming a loan guarantor is tricky as you put our own financial reputation at risk.
