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Risks of Being a Loan Guarantor

As a loan guarantor, you can help a friend or family member to avail credit when he does not meet the loan eligibility criteria set by the lender. But you must remember that the borrower and the guarantor are legally liable for repayment of the loan. A lender requires the borrower to bring a third-party guarantor on board when the credit involves additional risk or borrower does not meet loan eligibility criteria.

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Risks of Being a Loan Guarantor

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  1. Risks of Being a Loan Guarantor

  2.  As a loan guarantor, you can help a friend or family member to avail credit when he does not meet the loan eligibility criteria set by the lender.  But you must remember that the borrower and the guarantor are legally liable for repayment of the loan.  A lender requires the borrower to bring a third-party guarantor on board when the credit involves additional risk or borrower does not meet loan eligibility criteria.

  3. In case the original borrower does not honour his obligation or repay loan EMIs on time, the lender will compel the guarantor to repay the loan. Once you sign the loan agreement as a guarantor, you become liable to repay the loan in case the borrower defaults.  There are always chances that you have to avail credit to repay the loan. Also, the loan guarantee will also appear in the account sections of your credit report. Hence, you must keep in mind the risks of being a loan guarantor before agreeing to become to loan guarantor.

  4. Understanding Major Risks of Being a Loan Guarantor Undertake Financial Responsibility of the Borrower  A lender requires the borrower to bring a third-party guarantor on board a loan only if he does not meet all loan eligibility criteria.  For instance, a bank or financial institution may ask the borrower to bring a third-party guarantor on board if he does not meet the income requirements for a specific loan.  Likewise, lenders also require borrowers with poor repayment track records to guarantee unsecured loans.

  5. Loan Guarantee can be Limited or Unlimited  The quantum of guarantee differs according to the nature and type of the loan. According to the terms of the loan agreement, a loan guarantee can be either limited or unlimited.  When the loan guarantee is limited, you are liable to repay a specific percentage of the original debt.  On the other hand, you will be required to repay the loan fully if the guarantee is unlimited. Hence, you must determine the type of guarantee by reading the loan document fully.  Your financial obligation will increase significantly if the guarantee is unlimited and the original borrower defaults payment.

  6. Not easy to Mitigate the Financial Responsibility  Legally, the borrower and the guarantor are equally responsible for loan repayment.  Once you guarantee a loan, you undertake the financial responsibility of loan repayment in case the original borrower defaults.  But you cannot withdraw from the responsibility easily. The lender will approach you to repay the loan if the borrower defaults.  You need to consent of both lender and primary borrower to withdraw from the responsibility.  Also, no lender allows the original guarantor to withdraw from the financial responsibility without an alternative guarantee.

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