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When an applicant of a loan – home loan, personal loan or any type of loan, has a poor track record of debt repayments, there are slender chances of him/her being offered credit. However, some banks and financial institutions offer loans to applicants with a negative credit history on condition that the applicant has a loan guarantor. A guarantor has to be one with a good CIBIL score, offering the concerned bank or financial institution the assurance of retrieving the pre-determined payments within the pre-decided due date. Even if the applicant defaults on loan repayments, the guarantor can financially assist the borrower in making the loan payments on time. Unsecured loans like educational loan and personal loans record the most instances where borrowers are asked for a guarantor.
Applicants usually sign up for loan offers where banks and financial institutions ask for a loan guarantor without understanding the terms and conditions that accompany it. The same can be said for guarantors as well. They are usually friends, relatives and acquaintances of borrowers and sign up as guarantors in good faith. However, they are often unaware of the meaning of becoming a guarantor for a borrower with a poor credit history.
Legally, a guarantor is a co-applicant without the benefits of a beneficiary. Therefore, when the applicant defaults, it not only adversely affects his/her CIBIL score, but the guarantor’s too, without any fault of his/her own. If the applicant is unable to pay for the loan for a considerable period of time, the concerned bank or financial institution might ask the guarantor to pay the outstanding dues on the applicant’s behalf. Under such circumstances, not only is the borrower viewed as a debtor, but the guarantor also becomes a defaulter of the loan.
When an individual becomes a guarantor, a separate CIBIL account gets created and information regarding debt repayments made by the applicant appears in the guarantor’s CIBIL report as well. This information will be accessible to the future prospective lenders of the guarantor, hampering his/her scope of loan and credit card eligibility. Further, if the borrower dies, it will be the responsibility of the guarantor to repay the balance debt amount of the loan. After being seen as a defaulter, the guarantor has to take as much effort to improve his/her CIBIL score as the primary borrower.
Some banks and financial institutions offer guarantors the provision of un-guaranteeing a loan. At other times, lenders offer guarantors the benefit of passing on the responsibilities of a guarantor to another individual as a replacement. However, the chances of getting a substitute guarantor are usually slender. Not all lenders offer this benefit. Read the loan document carefully to know the features and benefits the lender offers to loan guarantors. Once you officially become a guarantor, you would not be able to avoid the terms and conditions that you have signed up for.
Taking a decision on whether becoming a loan guarantor would not affect your CIBIL score and report may not be an easy one. Apart from accurately analyzing the scope for negative consequences, it might be a sensitive issue for you to refuse the request for becoming a guarantor. This is because such requests are usually made by friends, family and acquaintances. Becoming a guarantor for small personal loans and short term loans are comparatively less risky. For long term loans, it is recommended that you opt for an additional guarantor to share the debt burden, in case such a situation arises. A payment insurance will also be helpful in the eventuality of the death of the borrower.
Can I stop being a loan guarantor?
You can stop being a loan guarantor only if the terms of the loan document offer the guarantor this benefit. This is one of the essential terms that you should check for while becoming a loan guarantor. If the agreement that you have entered into as a loan guarantor does not mention this benefit, there is no way by which you can now stop being a loan guarantor.
Can anyone become a loan guarantor?
Banks and financial institutions generally have their own terms and conditions regarding who they would accept as a loan guarantor. They usually approve of an individual with a steady source of monthly income, assuring them of timeliness of payment of dues, even when the primary borrower defaults. Also, they usually prefer an individual with a higher CIBIL score than the primary borrower, indicating at his/her creditworthiness. Some lenders may emphasize on the primary borrower and the loan guarantor works in the same organization, so that their employer could be contacted in case both of them default.
What are the eligibility criteria for being a loan guarantor?
The usual eligibility criteria that banks and financial institutions usually look for in a suitable loan guarantor are:
When do lenders ask a loan applicant for a guarantor?
Here are some reasons that may make banks and financial institutions ask for a loan guarantor from a loan applicant: