As a loan guarantor, before the bank does, you should also conduct some unofficial checks on the borrower like assessing whether the individual will be able to repay the loan, creditworthiness, the purpose of the loan, the personтАЩs financial stability, and many other factors.
You may face these dire consequences if borrower defaults (Image: Freepik)
Banks at times ask for a guarantor if the loan amount is above a certain threshold, the applicantтАЩs income level is low or credit score is not satisfactory. Lenders usually ask the borrower to bring a guarantor when they donтАЩt have full confidence in the loan applicantтАЩs ability to repay the loan. Lenders may also require a guarantor if the borrower fails to meet some other specific eligibility criteria.
As a loan guarantor, before the bank does, you should also conduct some unofficial checks on the borrower like assessing whether the individual will be able to repay the loan, creditworthiness, the purpose of the loan, the personтАЩs financial stability, and many other factors. Remember, if the borrower fails to pay the loan in future, the lender will come to you next to get back its money and you will be liable to pay.
Unforeseen events may result in the borrower defaulting on a loan
The borrower, once confident in his ability to repay the loan, might find himself grappling with difficulties in repaying the dues because of factors like job loss, financial trouble, health crisis, and economic downturn. In such situations, despite making the best efforts to stay afloat, the borrower might find himself sinking deeper into debt.
Imagine you are a loan guarantor, and over time, your communication with the borrower becomes infrequent or stops altogether. You donтАЩt know whatтАЩs happening in the personтАЩs life or how he is doing financially. Suddenly, one day, you find out that the person has missed payments for several months. You receive a notice from the bank, and you try to reach out to the borrower, but you get no response.
In such a situation, you tend to become more worried due to the lack of communication with the borrower and the fear of what the bank will do next.
Consequences of being a loan guarantor if the borrower defaults
Adhil Shetty, CEO of BankBazaar, explains how banks or financial institutions respond when a borrower defaults on a loan and its implications for the loan guarantor.
тАЬIf a borrower defaults on repayment of a loan, the lender gets in touch with the borrower first to recover the dues. If the borrower is unable to settle the dues, the lender contacts the guarantor to pay off the EMIs and the late fees. If the guarantor fails to pay off the outstanding balance, the bank has the right to liquidate their personal assets such as property to recover the dues,тАЭ Shetty says.
As a loan guarantor, your credit score and future loan eligibility are at risk
As a loan guarantor, your credit score can get knocked down if the borrower defaults on the loan, says Shetty, adding that also, when you become a loan guarantor, your eligibility for future loans reduces.
тАЬThis is because in case the borrower defaults on the loan, the liability to pay off the dues is shifted from the borrower to the loan guarantor. So before you sign up as a guarantor, you might want to check the financial discipline of the borrower as well as if your future financial commitments, such as if you wish to take any loan in the near future. This is why itтАЩs important that you check your and the borrowerтАЩs credit score before you sign up as a guarantor. If either is already at a low, you donтАЩt want to expose yourself to further vulnerability by becoming a loan guarantor.тАЭ
Conclusion:
When you agree to be a loan guarantor, you take responsibility that in the event of default on loan by the original borrower you will repay the loan. Remember, if the borrower fails to make payments on time or default completely, it will reflect on your credit history, lower your credit score and make it harder for you to secure loans in future. In essence, becoming a loan guarantor is tricky as you put our own financial reputation at risk.
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