Loans: Four risks of being a loan guarantor

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Lenders require a guarantor when the primary borrower requests a loan amount above their eligibility with a high default risk, a Cibil score below 650, an advanced age or a risky job profile. Although each lender has different rules for a loan guarantor who has sufficient income to repay the loan, one must be very careful when presenting themselves as a guarantor, especially for larger amounts with a long duration such as loans. real estate or unsecured personal loans.

If the primary borrower or even co-borrowers default, the lender will first liquidate the primary borrower’s assets to recover their money. If this does not happen, the lender will send a notice to the guarantor to pay the outstanding loan.

The guarantor must understand all the risks involved before signing the document. He must regularly check the repayment status of the borrower, verify the employment status and insist that the borrower purchase loan protection insurance coverage, which will reduce the liability in the event of the unfortunate death of the borrower. borrower or co-borrowers.

So here are four factors to keep in mind when signing on as a loan guarantor:

Check the repayment capacity of the borrower

The lender will insist on a guarantor if they believe the borrower is at high risk of default. Be candid and ask the borrower, whether it’s your relative or a close friend, about their source of income and assets that can be liquidated to clear the loan in the event of default. Ask the borrower to show their credit report, which will contain details of all their outstanding loans and repayments. If the credit report seems weak, it is better to refuse to be the guarantor. If the borrower or co-borrowers default on the loan, the guarantor will have to pay the entire amount outstanding.

Stay away if you need a loan yourself

If you are considering taking out a loan, be it a home, vehicle or even a personal loan, it is advisable not to sign up as a guarantor as the lending institution may reduce your eligibility for the loan if you are the guarantor of another person. As lenders offer special rates to people with high credit scores (750 and above Cibil), a default by the primary borrower or irregular payment of EMIs will also negatively impact the credit score of the guarantor. And he won’t be able to get a loan at lower interest rates even if he was quick to repay his loans. All credit research agencies share information about loan guarantors with lenders.

Insist on loan protection insurance

In the event of default by the borrower, the lender will send a formal notice to the guarantor to pay the contribution. If the guarantor fails to do so, the lender will mark him as a voluntary defaulter and he cannot apply for a loan for himself in the future. Experts suggest that the guarantor should ensure that the borrower or co-borrowers have a loan protection insurance plan. Although this insurance plan does not cover any defaults, it will cover repayments in the event that the borrower or co-borrowers die or become disabled during the term of the loan.

Sign an indemnity agreement

If you still have to be a guarantor for whatever reason, it is always better to have a contingency plan in case the borrower defaults. It is difficult to withdraw as a guarantor during the term of the loan because the lender and the main borrower(s) and co-borrower(s) will have to find a new one. Experts say the guarantor should enlist the help of all family members and close associates of the borrower or co-borrowers to find ways to pay dues to the lender. In addition, the guarantor must sign an indemnification agreement with the borrower before the default to ensure that he reimburses him the money that has been paid to the bank on his behalf.

COVER RISKS

— If the borrower’s credit file seems weak, it is better to refuse to be the guarantor

— If you are considering taking out a loan, do not register as a guarantor as this will reduce your eligibility for the loan

— A loan protection insurance plan covers payments if the borrower dies or becomes disabled during the life of the loan

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