A loan guarantor is someone who is legally liable to pay off the loan, in case the primary applicant is unable to do so. In addition, being a guarantor will not only make you liable to pay off the loan in case of a default, but your own borrowing capacity would reduce and your credit score will come down if the primary borrower defaults.
Banks can ask prospective borrowers to provide guarantors in different cases. This can happen in case the applicant :
- Requires a high loan amount which he can possibly default
- Has a low credit score and poor credit history
- Is old with little working life left or is retired
- Works in a high-risk profession
- Belongs to a low income group
Being a loan guarantor is not the same as being a co-borrower from the bank’s perspective but you have equal legal responsibility to pay off the loan. You are required to submit key documents such as income proof, assets and liabilities information etc.
When you sign up as a guarantor of a loan, it will show up on your credit report and therefore impact your credit score in case of a default. Your eligibility for new loans will also decrease as banks will factor in the loan you have guaranteed when determining your eligibility.
In case you are the guarantor of a loan whose primary borrower has defaulted, the bank will initially try to liquidate the primary borrower’s assets to recover its money. Subsequently, the lender will approach you in the capacity of the guarantor and ask you to pay off the outstanding amount. In case you are unable to pay the loan to the bank’s satisfaction the bank can legally seize and liquidate your personal assets to recover the balance amount.
Hence, the role of a guarantor is definitely not one that you should take lightly. Once you become a guarantor it is difficult to exit the agreement without the bank finding a suitable replacement. Thus, ensure you read the loan documents carefully to understand the extent of your liability before signing the documents.
Sabyasachi Paul has been associated with equity research and advisory on equity markets in India for over 9 years & currently heads the equity research desk of Eastern Financiers Ltd, Kolkata.He also manages a portfolio on the online platform Kristal. Find link to the strategy named ‘The Tortoise’