Rules for Loan Guarantor

Loans come in various sizes and for various purposes. When the loan involves a higher amount, then banks or other lenders may ask for a third person to sign the loan application as a guarantor. There are many different interpretations of the word and the implications of being a guarantor. So we bring in this article to clear the air around rules for a loan guarantor.

Who is a Loan Guarantor?

A guarantor for a loan can be any person who agrees to take up the responsibility of any other person’s debt. By being a guarantor, the third person gives his consent to pay back the loan of the person who is availing the loan. The guarantor will need to pay back the loan, in the event of the borrower not being able to pay back the loan due to any reason. Here it is important to understand that, a guarantor is different from the witness who signs on the loan documents.

For Which Loans is a Guarantor Required?

There is no categorization of loans for which a guarantor is required. It is based on the rules and regulations followed by individual banks. Generally, guarantors may be required for loans over Rs 5 lakhs. This may also vary depending upon the credit score and other factors such as employment, residential status, etc.

For Example: When giving out a loan to an NRI, bankers may insist on getting a guarantee as the applicant is not based in India. Similar may be the case for a person with a low credit score.

RBI Guidelines Regarding Rules for a Loan Guarantor

RBI allows the banks to frame their guidelines for loans that require guarantors and their treatment. As said earlier, this depends on the various factors like creditworthiness of the applicant, his income, employment and residential details.

What are the Conditions Under which the Guarantor will have to Pay Back the Loan?

The guarantor is responsible for the repayment of the loan in all the cases when the borrower or the co-borrower or both of them together are unable to pay back the loan. This could be due to any reason like the death of the borrower, loss of his/her job/ a medical condition, etc. But, it is good to know that the responsibility of the guarantor does not come up immediately when the borrower stops making payments. The banks or the lender waits for some months and gives time to the borrower to make the payment. In spite of all the efforts, if the borrower does not make the payments, the bank then issues notice to the guarantor to bear the responsibility of making the loan repayment. But, the RBI has allowed the banks to ask the guarantor to pay up the amount even before exhausting all the available remedies against the principal borrower and co-borrower. In case, the guarantor does not make the payment of the loan EMIs in spite of having the funds at his disposal, then he will be considered as a wilful defaulter. This can have further repercussions on the credit score of the guarantor.

What are the Risks Involved in Providing a Guarantee to Someone Availing a Loan?

The first and the foremost thing that anyone providing a guarantee should understand is that the guarantor is as responsible as the borrower to make repayment of the loan. The need to pay back may come due to emergencies and contingencies which the guarantor is totally unprepared for.

Some of the points that an individual giving a guarantee should keep in mind are:
  • Impact of the Guarantee on the Credit Score of the Guarantor

    At the outset, there is no negative impact of providing a guarantee to a borrower. But in the eyes of a bank, both are equally responsible. In case of a default by the loan borrower, the guarantor will also see an impact on his credit score. Further, if the guarantor is also not able to pay back the loan, he/she is considered as a wilful defaulter which will end up as a big red mark on the credit score.

  • Additional Financial Burden in Case of Default by the Borrower

    In case of loan default by the borrower, there will be an additional financial burden on the guarantor, which the guarantor should be ready to bear with.

  • Effect on the Ability to Avail Loans in Future

    The credit bureau is informed whenever a guarantor provides a guarantee to any loan. So when the guarantor applies for a loan for himself in the future, the guaranteed loan is also considered as a loan availed by him. So, this will have an impact on any further loan that will be applied in the future.

    For Example: If you have a home loan of Rs 30 lakhs for yourself and stand guarantee for a Rs 20 lakh education loan, then your ability to avail loans for yourself in the future may be restricted. This may come across as a big problem if you run into emergency situations and you need instant cash. So, this will have an impact on any further loan that will be applied in the future.

  • A Guarantee once offered, Can’t be Cancelled

    A guarantor should understand that once you stand guarantee for a loan, it cannot be canceled in any circumstances. So, a standing guarantee for a loan can be quite a risky affair. Therefore, it is good to stand guarantee only for those individuals who are very well known to you and that they are capable of loan repayment.