Know the risks involved in standing guarantee for a loan

The reasons that can trigger a request for a guarantor include the following: the loan amount exceeding the eligibility of the borrowers, bad credit scores of the applicants, and even a risky job profile or employer profile of such applicants. Experts generally suggest caution when people agree to stand guarantee for any loans for a friend or family member.

Here are some of the risks of becoming a loan guarantor:

Loan repayment liability

As in the case of primary applicants and co-applicants, lenders will consider the income, job profile, credit score, employer’s profile, repayment capacity, etc., of the proposed guarantors while evaluating their candidature.

Gaurav Aggarwal, senior director, Paisabazaar.com, says, “In case the primary borrower and co-borrower(s) fail to repay the loan by the due date, the loan guarantor will be liable for the timely repayment of the loan. In case of a default, the lender can ask the guarantor to repay the outstanding loan amount along with other charges and penalties incurred due to non-repayment. “

Hence, loan guarantors should always persuade borrowers to opt for loan protection insurance plans. This process will reduce your repayment liability arising due to the unfortunate demise or disability of the borrowers.

Impact on credit score

Any default or delay in the loan repayment will also adversely impact the guarantor’s credit score. Hence, double-check the financial stability and discipline of the primary borrowers and co-borrowers before accepting the role of loan guarantor.

“Also, it is necessary to keep a close tab on the repayment activities in the loans guaranteed by you. You should also fetch your credit report at regular intervals as any default or delay in the loan repayment will reflect in your credit reports as well,” added Aggarwal.

Impact on loan eligibility

Once you become a loan guarantor, your loan eligibility will be reduced by the outstanding amount of the guaranteed loan. Aggarwal said, “The outstanding loan amount of guaranteed loans are considered as contingent liability for the guarantor.” Thus, always assess your future loan requirements before assuming the responsibility of the loan guarantor.

Also, once you become a loan guarantor, you cannot withdraw from the responsibility till the lender and primary/co-borrower(s) find a mutually acceptable new replacement as guarantor.