Why Banks Ask for a Loan Guarantor?

Getting a loan of any kind is quite easy these days. Let it be a land mortgage loan, education loan for MBA, or even a used car loan, you can typically get it approved within a few weeks. However, sometimes a bank may ask you to bring in loan guarantor for them to approve the loan. The reason could be anything. If the loan amount is quite high, or if your CIBIL score is not high enough, the transaction may appear “risky” from the bank’s point of view.

Here are some of the most common situations when banks ask for a loan guarantor:

  • Payment History: When the borrower has a inconsistent payment record, which can be easily observed through their credit report. If there is a mention of loan defaulting or CIBIL dispute then again the bank may ask for a loan guarantor.
  • Nature of Job: If the job of the applicant is transferable, or is of the nature that requires them to travel overseas often, then again the bank may want the borrower to get a loan guarantor. If the borrower’s residential address is also likely to change soon, then also the need of a guarantor may emerge.
  • Loan Value Vs Collateral Value: If the value of the collateral that the borrower is providing is lower than the loan value itself, then for additional security the bank may want them to get a loan guarantor. In case of a home loan the bank may fear that the price of the real estate may fall in the future, and ask for a guarantor.
  • Education Loans: Education loans are risky themselves, and when they are for studying abroad, then the risk is even greater. A student may get a job overseas and settle there, and then getting them to repay the loan can become difficult for the lender. So, to get some assurance they can have the applicant get a guarantor sign the loan papers along with them.

When, as a loan guarantor you sign the loan papers along with the loan applicant, then you legally agree to be considered responsible should the applicant defaults on the loan, or fails to repay on time. According to a ruling passed by the Supreme court you will be fully liable in case the applicant doesn’t repay for any reason. In other words- you may have to repay the entire loan amount yourself. Thus, if someone is asking you to become a loan guarantor then take your time before committing to anything. In the future you may have to pay dearly for your actions.

If a friend of yours, or a relative has asked you to become a loan guarantor for them, be sure to ask yourself the following questions:

  1. What is the Debt Amount in Question?

It goes without saying that the higher is the amount the greater is the risk. If you don’t feel comfortable with the amount then you don’t have to say yes.

  1. What are the terms and conditions?

Make sure you read through all the terms and conditions before making any decision. While there are some standard terms for all kinds of loans, they may be slightly different in your case. If you will have to repay the full loan amount in case the borrower defaults then it is better to decline the request.

  1. Are there any assets involved?

Check if the bank will be getting access to your assets, such as your home, in case the borrower fails to repay the loan. If so is the case, then again it is too high a risk to take.

Even when the stakes are low, and there is little liability involved, there are risks still. You may not have to pay anything if the borrower defaults, but your CIBIL score will be affected nevertheless.  This can make really difficult for you to take a loan in the future. Trying to improve CIBIL score can also take a lot of your time and effort. The best way to protect your credit history is to take calculated risks. Say “yes” to becoming a loan guarantor only when you are fully confident in the borrower. If you have the slightest doubt whether they will be able to repay the loan or not, walk away from the request.