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Potential Risks of Loan Guarantor

jaspreet1991


When our family members requested that we serve as guarantors for their loans, how many of us got ourselves into trouble? When a primary borrower does not have an excellent credit record, lenders require a guarantor. There is an inherent risk aspect that all lenders want to minimise when it comes to lending money and money on credit. The policy of requesting that their customers provide a guarantee who can take over the loan's responsibility in the event of an abnormality is the result of this.


Loan guarantors who earn enough and are financially capable of repaying the loan amount demanded by different lenders are subject to varied laws. The loan amount and the terms and conditions of the loan, especially whether it is a home loan or an unsecured personal loan, must be carefully considered regardless of the reason for taking on the obligation of repaying the debt if the borrower dies or is otherwise unable to return the amount. Because the lender initially liquidates the primary borrower's assets in the event of default by the primary borrower or the incapacity to repay by the co-borrower, this results in the primary borrower's assets being liquidated first. When it is impossible for the lender to retrieve the outstanding loan amount, it will notify the guarantor and ask them to pay the rest.




Taking on the responsibility of a loan guarantor entails a degree of risk. It's like taking on an unwelcome obligation that will eat away at your profits in the long run. ' This means that instead of being selfless, you must be smart while agreeing to pay back a loan. Verify the borrower's credentials, including their work status, income, regularity of ITR filing, and physical fitness. Accepting the role of guarantor does not relieve you of the responsibility of taking all reasonable safeguards. The borrower can be asked to obtain loan protection insurance, such as a mortgage insurance policy, or any other to cover the borrower's financial obligations in the event of his or her untimely death. Other than these, you must take care of the following things before signing up as a loan guarantee before signing up.




Ensure that the borrower is able to pay back the loan

A guarantor is required by the lender since the borrower is at significant risk of defaulting on the loan. Regardless of how well you get along with the borrower, you need to find out more about his financial situation. Find out how much of the borrower's existing assets he or she needs to have on hand in case a liquidity check is needed. Ask for a copy of the borrower's credit report or the bank's credit score to see if he or she is a trustworthy borrower. If the applicant's credit score is less than 650, do not guarantee the loan amount. Owed to the fact that you may be held liable for the full amount due if the borrower or co-borrower defaults on the loan,




Please avoid if you need a loan yourself

You'll have a harder time getting a loan if the bank finds out that you've already signed on as a guarantee for someone else's debt. With a good credit score, borrowers can get lower interest rates on loans from lenders. As a result, credit rating agencies may reduce your rating if you agree to serve as a loan guarantor. As a result, you won't be eligible for lower-interest loans.




Insurance for the safety of your loan

Lenders will contact the guarantor if a borrower defaults on their loan payments. A loan guarantor who fails to meet his or her responsibilities will be declared a "wilful defaulter" and prohibited from obtaining future loans. If the borrower does not have enough money to repay the loan, you should ask them to get a loan protection insurance plan. Because of the borrower's financial circumstances or premature demise, you will no longer be responsible for repaying the debt.





Don't disregard the warning signs that anything is wrong

It's understandable if you'd like to maintain ties with your family and friends, but money can be the greatest divider of all. In order to get rid of someone, offer to lend him money, and later ask for it back. Money may disclose a lot about you, which is why you shouldn't disregard any warning signs you receive about it.


  • If the borrower's credit looks inadequate, decline to be a guarantor.

  • For those who plan to borrow money in the near future, it's best to avoid being a loan guarantor in the first place.

  • If a borrower refuses to purchase loan insurance, it is a red flag that the borrower is unconcerned about repaying the debt or is taking his or her obligation to the lender lightly. If you don't have insurance, you'll be forced to pay back the loan, which might put a strain on your wallet in the long run.

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