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A loan guarantor is legally liable to pay off the loan or the outstanding loan amount, in case if the primary applicant is unable to repay it. He will be solely responsible for a part or all of the debt amount undertaken by the borrower. Usually a guarantor can be anyone even from your relatives, friends or colleagues. They co-sign the loan application along with the borrower to provide a guarantee to the lender that if under any circumstance, the borrower is unable to repay the borrowed amount, then the guarantor will be asked for the repayments. Being a guarantor isn’t as simple as just signing a document. Till the borrower does the timely repayments there is nothing to worry, but if under any unforeseen situation EMIs have been skipped for over a month, then the lender can reach out to the guarantor and ask him for the repayment for the outstanding amount. And if the guarantor fails to do so the lenders (banks) have the authority to undertake legal actions against both the primary borrower and the guarantor.
When a guarantor signs up for a loan agreement for someone else and the loan is defaulted, it reflects negatively on the CIBIL Report of the guarantor as well. The Credit Information Companies (CIC) such as CIBIL and Equifax keeps a track of the repayment of the loan and in case of any defaults, the credit score of the primary borrower and the guarantor also gets affected.
If the primary borrower is unable to repay the EMIs and defaults, the bank will at the outset try to convert the primary borrower’s assets to recover the money. The lender will approach you before doing this as you were the guarantor for that borrowing. You will be asked to pay off the outstanding amount and if you are unable to repay the loan, the bank can legally seize and liquidate your personal assets like land, property etc. to recover the outstanding amount.
It is essential to remember that if you are a guarantor for any loan, then it will be counted on your open lines of credit, hence your personal eligibility can be hampered. Any defaults in payment will take a hit on your score too. So if you want to take a loan for yourself you may face difficulty because of low credit score.
To be on the safer side, before signing the agreement as a guarantor you can ask the borrower to arrange for another guarantor, so that responsibility is shared and you aren’t solely responsible.
Before signing up as a guarantor, always read all the clauses and only then sign the agreement. Ask about the obligations as a guarantor, understand how it will affect your relationship with the primary borrower, e.g.in case of divorce when the partners get separated, or if the primary borrower dies and his assets in such a situation should not automatically be passed onto heirs.
Always keep a track of the payments regarding the loan for which you are a guarantor. A single default in EMIs can be reflected in your profile too, so be a bit active and take an update regarding the repayments.
Conclusion
The role of a guarantor definitely cannot be take lightly, understand the extent of your liability and responsibility. You have very few options if you want to back out at a later date. The lender will let you to relinquish from your current role as a guarantor only if there is a suitable replacement and the primary borrower also agrees to it.
