Risks to avoid when signing up as a loan guarantor

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By Gaurav Aggarwal

Lenders often ask some of their loan applicants to use loan guarantors. Lenders usually add this requirement when they are unsure of the repayment capacity of primary borrowers and co-borrowers. Other situations in which lenders may request loan guarantors include inadequate credit rating of primary loan applicants, risky employer or employment profile, loan amounts exceeding borrowers eligibility , the primary borrower approaching or exceeding the age limit for applying for the loan, etc.

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

Risks of incurring loan repayment debt

Just like in the case of principal applicants and co-applicants, lenders consider income, employment profile, credit score, repayment capacity, employer profile, etc. of the proposed guarantor during the evaluation of his candidacy. The main reason is that the loan guarantor would be held responsible for the timely repayment of the secured loan in the event that the primary borrower and the co-borrower(s) in the loan account fail to repay the loan when due. In the event of default, the lender would require the guarantor to repay the outstanding loan amount along with any penalties and other charges incurred due to non-repayment.

Thus, those considering becoming loan guarantors still need to persuade the lead applicant and co-applicants to opt for loan protection insurance plans. This would reduce the guarantor’s repayment liability caused by the unfortunate death or disability of the principals/co-borrowers.

Impact on credit score

Since loan guarantors also become responsible for the timely repayment of their secured loans, any delay or default in loan repayment would also negatively impact the credit ratings of the guarantors. This would affect future eligibility for the loan and the loan guarantor’s credit card. Thus, the financial stability and discipline of the main borrower and the co-borrower(s) should be checked before becoming their loan guarantor.

One should also make sure to keep an eye on the repayment activities of the secured loans. In addition, one should also retrieve his credit reports at regular intervals as any delay or default in loan repayment will also reflect in his credit reports.

Impact on Loan Eligibility

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

Always be sure to assess future loan needs if you are considering securing a loan.

Not easy to get out of the role

Once a person becomes a loan guarantor, they cannot remove themselves from that position until the lender and principal/co-borrower(s) of the secured loan find a mutually agreeable person to become the new guarantor of substitution. This is another reason why one should always carefully assess one’s short and medium term loan needs before becoming a loan guarantor.

(The author is Senior Manager, Paisabazaar.com)

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