Lenders insist on a guarantor where the primary borrower is applying for a loan amount which is higher than his eligibility with high default risk, has a Cibil score of less than 650, is of advanced age or has a risky job profile. While each lender has different rules for a loan guarantor who has sufficient income to pay off the loan, one must be very cautious when standing as a guarantor, especially for larger amounts with a long tenure such as home loans or unsecured personal loans.
In case of a default by the primary borrower or even co-borrowers, the lender will first liquidate the primary borrower’s assets to recover its money. If that does not happen, then the lender will send a notice to the guarantor to pay the outstanding loan.
The guarantor must understand all the risks involved before signing the paper. He must regularly check the repayment records of the borrower, check the employment status and insist that the borrower buys a loan protection insurance cover, which will lower the liabilities in case of unfortunate demise of the borrower or co-borrowers.
So, here are four factors to be kept in mind when signing up as a loan guarantor:
Check borrower’s repaying capacity
The lender will insist on a guarantor in case it feels the borrower has high default risk. Be frank and ask the borrower, be it your relative or a close friend, his source of income and assets which can be liquidated to clear the loan in case of a default. Ask the borrower to show his credit report, which will have details of all his outstanding loans and repayments. If the credit report looks weak, it is better to refuse to be the guarantor. If the borrower or the co-borrowers default on the loan, the guarantor will have to pay the entire outstanding amount due.
Stay away if you need a loan yourself
If you are planning to take a loan, be it housing, vehicle or even a personal loan, it is advisable not to sign on as a guarantor as the lending institution may reduce your loan eligibility if you are a guarantor for someone else. As lenders offer special rates to people with high credit scores (750-plus Cibil), a default by the primary borrower or irregular payment of EMIs will have an adverse impact on the guarantor’s credit score, too. And he will not be able to get a loan at lower interest rates even if he has been prompt in making payments on his loans. All credit research agencies share information about loan guarantors to the lenders.
Insist on loan protection insurance
In case of a default by the borrower, the lender will send a notice to the guarantor to pay the dues. In case the guarantor fails to do this, the lender will mark him as wilful defaulter and he will not be able to apply for any loan for himself in the future. Experts suggest that the guarantor must ensure that the borrower or the co-borrowers have a loan protection insurance plan. While this insurance plan will not cover any default, it will take care of the payouts in case the borrower or the co-borrowers die or suffer disability during the tenure of the loan.
Sign an indemnity agreement
If you still have to be a guarantor whatever the reason, it is always better to have a contingency plan in case the borrower defaults. It is difficult to withdraw as a guarantor during the loan tenure as the lender and the primary and co-borrower(s) will have to find a new one. Experts say the guarantor must seek help from all the family members and close associates of the borrower or co-borrowers to find ways to pay the dues to the lender. Also, the guarantor must sign an indemnity agreement with the borrower before the default to ensure that he repays the money to him that has been paid to the bank on his behalf.
COVER THE RISKS
— If the credit report of the borrower looks weak, it is better to refuse to be the guarantor
— If you are planning to take a loan, do not sign up as a guarantor as it will reduce your loan eligibility
— A loan protection insurance plan takes care of the payouts if the borrower dies or suffers disability during the loan tenure
