Facts You Must Know Before Signing as a Loan Guarantor!

Well-known banks and non-banking finance companies affiliated with Fincity offer loans to people from every walk of life, most however belonging to the middle-income category. In some cases, however, the lender requires that a guarantor be added to the documents. Till the 90s, lenders made it almost mandatory to add a guarantor, but these days a lender may ask for a guarantor only in case of borrowers with a high-risk profile. Adding a guarantor in such a situation makes it more comfortable for the lender to disburse the loan amount.

When do you need a home loan guarantor? 

A home loan lender may ask you to list a guarantor if: 

i) the amount you want to borrow exceeds the limit generally sanctioned.   

ii) you lack financial strength. 

iii) you are aged and nearing retirement or have a high-risk job. 

iv) you are self-employed with no consistent income or if your salary is lower than the predetermined minimum income. 

v) If your credit history/score is poor and riddled with debt repayment defaults.  

Who is eligible to be a guarantor? 

A person can sign up as a loan guarantor if they’re: 

i)  over 18 years of age. 

ii) a citizen of the country. 

iii) if their income is high enough to settle the loan (with interest) in case the borrower is unable to make the payment or if the borrower doesn’t have the loan covered by a protection insurance and expires before paying off the entire loan amount.

It’s important to note that when you sign up as a loan guarantor, you limit your borrowing capacity and legally hold responsibility to repay the loan if the borrower defaults. Now, the borrower can choose to be their own guarantor if they own another property they can pledge but lenders generally prefer a third-party guarantor.

Let’s highlight a few facts you should be aware of before enlisting as a loan guarantor.

  1. You are contractually bound until complete loan repayment 

As a loan guarantor, you are legally obligated to clear the loan along with interest and other dues created by the primary borrow, in case they are unable to. The court will take legal action against a “willful defaulter” and their guarantors.  

  1. Court may attach your assets to foreclose loan 

In case the borrower defaults and the guarantor is also not able to pay up, the court can attach the guarantor’s assets to cover the loan amount and losses incurred by the lender. 

  1. Financial guarantor vs Non-financial guarantor 

A financial company may ask for either type of guarantor. A non-financial guarantor is required for simple purposes like contacting the primary borrower in case they’re unreachable. But in the case of a financial guarantor, their financial documents are evaluated, and are financially liable to repay the borrower’s debts in case they default.

  1. Your loan eligibility is impacted

As discussed before, the law holds the guarantor as legally accountable for the loan as the primary borrower. Unfortunately, this affects the loan eligibility of the guarantor, meaning – if the borrower has taken a Rs. 50 lakh home loan, the guarantor’s eligibility reduces by Rs. 50 lakhs. Not just that, any default or other negative repayment pattern by the borrower has a direct impact on the guarantor’s credit score. Check how much loan you are eligible for with Fincity’s loan eligibility calculator.

  1. You are obligated till the loan tenure ends 

It’s important to remember that the guarantor is liable for the loan till the loan tenure is over. In case a loan is foreclosed before time, the guarantor should seek an NOC from the lender and also ensure that the lender notifies the credit scoring companies about the release of guarantorship. This will allow the guarantor to get a higher loan amount sanctioned for themselves.

Hope this helps you understand your role before you guarantee a friend’s or relative’s loan debt repayment.

More questions? Connect with a Loan Expert!