The credit rating of the loan guarantor can be affected if a borrower does not repay

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Many have lost their jobs or suffered wage cuts in recent years due to lockdowns due to the covid-19 pandemic. Some also defaulted on their loans if the bank did not offer them a loan restructuring.

If you are guarantor of someone in default, you could find yourself in trouble.

Lenders typically require borrowers to use a guarantor when the loan amount is large or the bank is uncomfortable with the primary borrower’s repayment capacity.

The guarantor assumes the responsibility that if, in any scenario, the primary borrower does not pay the Equivalent Monthly Installments (EMI) of the loan, then the guarantor will take full responsibility for repayment.

If the primary borrower does not repay the loan, the responsibility for paying the outstanding amount rests with the loan guarantor. In the event of non-payment, the guarantor is exposed to legal proceedings. If the lender files a collection case, they will file the case against both the borrower and the guarantor. A court can force a guarantor to liquidate assets to repay the loan.

While things don’t turn out badly, there are other downsides to dealing with as a guarantor.

By the time you register as a guarantor, your loan eligibility decreases. If you apply for a loan, lenders will consider the outstanding loan amount for which you are guarantor as your contingent liability and may grant you credit accordingly.

In addition, the fact that you are guarantor of a loan will also appear in your credit report. It also means that any defaults, whether from the primary borrower or yourself, will affect your credit score.

If you are guarantor of a defaulting person, you will have to assume the consequences.

It is good practice to never become a guarantor for someone unless you are prepared to take repayment responsibility if they don’t.

(Do you have personal finance questions? Send them to [email protected] and get answers from industry experts)

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