While being a loan guarantor you may be helping a friend or relative but do you know any default by the primary borrower can land you in serious trouble and you may need to repay the outstanding amount.
Most of the loans such as home loans, car loans, or any other mortgage loans require a guarantor to approve the loan application. This minimizes their risk in case of non-payment. As in the case of defaults and non-payments they can ask guarantors to make the remaining payment.
Being a Guarantor
However, by signing as a guarantor for a loan, you are assuring the lender that you will repay the debt if the borrower or the co-borrower fails to do so.
If the borrower defaults the loan either due to death or due to any other reason the guarantor will be liable to pay the amount.
Moreover, if the primary borrower is defaulting with the EMIs, this can also affect the CIBIL score of the guarantor.
What should you do?
By becoming a loan guarantor you are trying to help your friend or relative, but let’s not think of emotions here as it is a money matter. Thus, you need to be careful and act accordingly.
Before you come to any conclusion, it’s important to know the financial capability of the primary borrower, ask them for their credit score. If you are satisfied with it, you can proceed ahead and become the loan guarantor.
Try not to become a guarantor unless the loan is for your spouse, child, or parents. Avoiding such huge financial liability even at the cost of sounding rude to a family member or friends makes sense.
When you are already a guarantor
If you are already a guarantor for a loan with your friend or relative and if it’s going well, then there is no issue. But in case you are not confident about his/her repaying capacity, you can ask the borrower to release you from being the guarantor of the loan. However, this is only possible when the primary borrower finds another guarantor. There is no way that you can approach the bank directly to cancel your guarantee.
This can only be done by the primary borrower by initiating a request.
What should you do before signing as a guarantor?
Think before you jump in
A borrower usually knocks the doors of a family member or a close friend to become his/her loan guarantor. In case you are being approached by someone, the first thing to do is assess/know his repayment capacity.
You should check the borrower like a professional/bank and sign the agreement only when you think he/she has the willingness as well as the ability to repay the loan.
Understand the risks involved
It is important to know that being a loan guarantor you will be liable to repay the loan in case the borrower defaults on the loan repayment. However, there are several other risks that the guarantor is exposed to which includes CIBIL and future creditworthiness of your own.