A guarantor is someone who pledges to repay the loan on behalf of the person who has taken the loan. If a lender is concerned about the borrower’s ability to repay he will insist for a guarantor. As a guarantor you are liable for repayment of the borrower’s debt in case of default or whatever other reason may be. You must realize that by agreeing to be a guarantor for someone you are reducing your own loan eligibility to the extent of the amount of loan you are liable for as a guarantor.
If a family or friend requests you to become a loan guarantor, it is difficult to refuse. But, before consenting to become a guarantor, it is necessary for you to consider what all it entails.
What if the borrower defaults?
If the borrower is not able to meet the repayment on time, the lender will turn to you to recover his loan. You will be the one with the bad credit record if you and the borrower can’t repay the loan. This will reflect badly on your credit report when you want to apply for a loan in the future.
Guarantees have no limitation. For e.g. you are signing up to be a guarantor for a home loan of Rs 2,500,000. As a guarantor you think that you are only a guarantor for the loan amount i.e. Rs 2,500,000. But, that is not the case. You are signing up to the home loan and subsequent borrowings or liabilities that the borrower enters into such as overdraft, personal loans, overdraft facilities, etc.
Who can be a guarantor?
Generally parents, siblings and other family members serve as guarantors for the loan. Banks and other lenders also allow extended family members and ex-spouses to act as guarantors. In case of home loans guarantors are usually limited to immediate family members.
Of what help is the guarantor?
With the help of a guarantor, borrowers, especially first time borrowers will be able to meet the bank’s criteria when applying for a loan. Guarantor loans enable people with a poor credit history to obtain loans.
Guarantor loans can have huge repercussions on your relationship with the borrower, in case the borrower defaults. By consenting to be a guarantor you’re risking your own finances for the borrower’s sake. You will not be able to flounce out of the loan at your own will. You are obligated to repay the entire loan amount to the lender including any additional charges, costs, etc. incurred with connection to the loan.
How does it work?
A guarantor generally allows his property to be used as collateral on the borrower’s loan. The mortgage will not support the loan but will be used to support the guarantee from the guarantor.
You must realise that you will not be able to forsake the commitment during the duration of the loan at your will. As a guarantor, you will not be subject to any recourse once the default takes place.
Will you be able to repay the loan in case the borrower defaults?
Are you willing to risk having your property repossessed in case the borrower defaults?
Did you seek legal advice when applying?
If you find that your borrower will fulfil all repayment commitments and you are confident of your current and projected finances you can consent to becoming a loan guarantor.