Rules for Loan Guarantor

What are the Rules for Loan Guarantors?

In India, a loan guarantor must be an Indian citizen over the age of 18, have a good credit score, and maintain a stable income.

If you are considering being a loan guarantor for someone close to you, this article will give you a clear idea of the requirements and responsibilities.

What is a Loan Guarantor?

A guarantor is someone who takes the responsibility of repaying the loan if the primary borrower defaults on payment. As a guarantor, you will be making a legal commitment, which means you will be contractually obligated to repay in case the borrower defaults.

For example, let’s say your friend Rahul wants to take a loan from the bank. The bank is hesitant to give Rahul the loan because of his poor credit history. You can step in as a guarantor to give additional assurance to the bank.

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What is the Role of a Loan Guarantor?

The guarantor’s role is to guarantee the repayment of the loan. As a guarantor, you will have to sign a legally binding contract that states that the borrower will repay the loan amount within the stipulated time.

The guarantor will be held liable under Section 128 of the Indian Contract Act to repay the borrower’s debt, including the interest and penalties.

What are the Advantages of a Guarantor?

For someone who is trying to get a loan approved, these are the advantages of having a guarantor:

  • If you do not meet the requirements set by a lender, having a guarantor can increase the chances of loan approval.

  • Since having a guarantor mitigates the risks of lending, lenders often provide more favourable loan terms to the borrower.

  • People with no credit history or a poor credit score can secure loans that they could not without a guarantor.

What are the Disadvantages of a Guarantor?

The disadvantages affect the guarantor more than the primary borrower.

  • If the borrower is unable to or refuses to repay the loan, the guarantor will be liable to pay the outstanding amount.

  • The guarantor’s credit score will be negatively affected if the borrower defaults or delays payment.

  • It might become difficult for a guarantor to take a loan for themselves. This is because a loan guarantor already has debt obligations in the eyes of lenders.

  • If the primary borrower defaults, the guarantor suffers the consequences as well. This can strain the relationship between the guarantor and borrower.

What are the Types of Loan Guarantors?

Depending on who acts as the guarantor, there can be three types of guarantors:

  • Personal Guarantor A personal guarantor is an individual who pledges their assets, like savings and property, to secure the loan.

  • Corporate Guarantor - A corporate entity or a company can also act as a guarantor by pledging its assets.

  • Collateral Guarantor - A borrower can provide collateral as security. In such cases, the collateral acts like a guarantor. In case of default, the collateral can be seized to recover the debt.

What are the Rules for Loan Defaulters?

A personal loan is deemed to be in default when the borrower does not make payments for a specified period, usually 90 days or longer. Once a borrower defaults, the lender can initiate the recovery process.

The defaulter will be notified multiple times regarding the non-payment before the lender starts the recovery process:

1-30 days overdue - The lender sends reminders through phone calls or SMS.

31-60 days overdue - Formal letters are sent by the lender.

61-90 days overdue - A formal letter warning about legal action is sent by the lender.

>90 days - The loan account is marked as NPA, and the recovery process starts.

Conclusion

Being a loan guarantor means carrying significant responsibilities and risks. However, it can improve loan approval chances for borrowers with poor credit or no credit history. Guarantors are advised to carefully weigh these benefits against drawbacks before making a decision. You can read more about the rules and regulations of personal loans here.

Rules for Loan Guarantors - Related FAQ

The guarantor has to sign an official document that makes them liable to repay the loan if the primary borrower fails to do so.
The lender can take legal action against the guarantor if payments are not made. This can lead to seizure of the guarantor's property or savings.
It is almost impossible to withdraw your name as a guarantor unless the borrower is able to find a new guarantor or pledge collateral.
Yes, a guarantor can be anyone, including family members, as long as they are legal adults with a good credit history and stable income.
Yes. According to Section 128 of the Indian Contract Act, the guarantor's liability is co-extensive with that of the borrower. This allows the bank to recover the loan from the guarantor.

The starting interest rate depends on factors such as credit history, financial obligations, specific lender's criteria and Terms and conditions. Moneyview is a digital lending platform; all loans are evaluated and disbursed by our lending partners, who are registered as Non-Banking Financial Companies or Banks with the Reserve Bank of India.

This article is for informational purposes only and does not constitute financial or legal advice. Always consult with your financial advisor for specific guidance.

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