Implications of being a loan guarantor

If you have been asked to become a guarantor for a loan availed by a friend or a relative, you may have gotten into a role you may not have bargained for.

Aug 27, 2017 05:08 IST India Infoline News Service

If you have been asked to become a guarantor for a loan availed by a friend or a relative, you may have gotten into a role you may not have bargained for. Becoming a guarantor for a loan taken by a relative or friend may be a social obligation, but it comes with responsibilities and financial liabilities that may adversely affect your own creditworthiness if the borrower defaults in repayment of the loan.

The guarantor of a loan may be a financial or non-financial. The role of non-financial guarantor is limited to liaising between the lender and borrower to resolve any issues and ensuring timely repayment of loan. The non-financial guarantor is not affected in any way if the borrower defaults in repayment of loan.

However, the financial guarantor’s role goes much beyond being just an intermediary between the lender and the borrower. The guarantor in this case takes it upon himself/herself to repay the outstanding loan amount in the event of any default in repayment of the loan by the borrower or in the event of unfortunate demise of the borrower. This is the crucial difference. The guarantor becomes legally liable for repaying the outstanding amount of loan if the borrower dies or defaults in repayment due to financial difficulties.

If the borrower defaults in payment of loan, it not only lowers the borrower’s credit score, but it also adversely impacts the guarantor’s credit score too. Besides, since the guarantor is liable for repayment of the defaulting borrower’s loan amount, the guarantor’s eligibility for loan reduces to the extent of outstanding loan amount.

Hence, it is prudent to assess the creditworthiness and repayment capacity of the borrower before becoming a guarantor of loan for any borrower.

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