Loan guarantor Rule: Nowadays it has become easier to get a loan from banks than before, but financial institutions impose many conditions to reduce their risk. One of the important conditions among these is the requirement of a loan guarantor. To protect its money, the bank asks for a reliable person as a guarantor who can take responsibility of the loan in case of the inability of the main borrower. This arrangement acts as an additional security cover for the bank.
Becoming a guarantor is a serious financial commitment that should not be taken lightly. When you guarantee someone’s loan, you are actually promising the bank that if the main borrower is unable to pay his installments, you will take over the responsibility in his place. Therefore, it is important to think deeply about all aspects before becoming a guarantor.
Difference between guarantor and co-borrower
Many people consider a loan guarantor and a co-borrower to be the same, but there is a clear difference between the two. The co-borrower is involved in the loan responsibility from the beginning and his name is also recorded in the loan documents along with the main borrower. On the other hand, the guarantor is not affected as long as both the main borrower and the co-borrower continue to fulfill their responsibilities. The bank approaches the guarantor only when the first two options fail.
It is important to understand this difference as it reveals the actual responsibility and risk of the guarantor. The position of a guarantor is a little delayed as compared to that of a co-borrower, but once the responsibility comes, it is just as serious. Therefore, any decision should be taken only after understanding the difference between the two roles.
Impact on CIBIL score
To become a loan guarantor, your credit score must be excellent because the bank checks the financial credibility of the guarantor. If your CIBIL score is low then the bank will not accept you as a guarantor. But the most important thing is that after becoming a guarantor, if the main borrower does not pay his installments on time, it also has a negative impact on your CIBIL score. This situation can affect your future loan applications.
A drop in credit score means that you will have difficulty getting a loan in the future or you may have to take a loan at a higher interest rate. This can become a long-term problem that can spoil your financial plans. Therefore, it is necessary to assess this risk before becoming a guarantor.
Possibility of legal action
If the main borrower dies or becomes completely unable to repay the loan for any reason, the bank has full right to recover the outstanding amount from the guarantor. In this situation, legal action can also be taken against the guarantor. In the case of home loans, the bank has the right to recover its money by selling the property. If the guarantor refuses to pay, legal proceedings can begin.
Legal action not only involves court proceedings but also the personal assets of the guarantor may be at risk. The bank may attach the guarantor’s immovable property, bank accounts and other assets to recover the dues. This situation can be extremely distressing for the guarantor and his family.
The challenge of freedom from responsibility
Once you become a loan guarantor, it is extremely difficult to get rid of this responsibility. The guarantor has to make a formal request to both the bank and the main borrower to get rid of his responsibility. Apart from this, the first guarantor cannot escape his responsibility until another person is ready as a guarantor. This process can last for months or years.
To protect its interests, the bank does not release the guarantor easily. They need full assurance that there will be no problem in recovering the loan. Therefore, before becoming a guarantor, one must understand that this is a long-term commitment from which it is not possible to get rid of quickly.
Precautions before becoming a guarantor
Before becoming someone’s loan guarantor, it is essential to study the financial condition of that person thoroughly. His income, expenses, other loans and payment history should be checked. If that person has a record of loan default in the past, then becoming his guarantor should be avoided. Apart from this, the main borrower should be asked to take life insurance so that there is no extra pressure on the guarantor in case of an emergency.
The amount of the loan is also an important factor. Only become a guarantor for an amount that you can afford to repay in an emergency. Read the loan terms carefully and understand under what circumstances you may have to pay. If possible, seek legal advice and have the guarantee documents reviewed.
Disclaimer
This article is prepared for general information purposes only and should not be construed as financial advice. It is essential to consult a financial advisor or legal expert before becoming a loan guarantor. The terms and conditions of different banks may vary, so get detailed information from the concerned bank.
