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.
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.
Get Funds in Your Account in Minutes
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.
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.
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.
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.
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.Disclaimer
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.
Was this information useful?