What are the implications of being a loan guarantor?

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Providing guarantee on a loan can prove to be good for the borrower as in certain circumstances it is the preliminary condition put forth by the banks to sanction a high-value loan.

But for the guarantor it means additional financial responsibility for the entire term of the loan. So, it makes real good sense to understand the obligations of the loan guarantor.

What are the implications of being a loan guarantor?

Also, if the guarantee for the debt taken by the third party shows in the credit report of the loan guarantor.

First of all, you should not sign the loan guarantee document just to please your friend or relative as its a long-term commitment on your part. And, as a guarantor on the loan you'll be required to pay the outstanding loan amount which the borrower fails to pay due to his/her financial standing, death or some other reason.

So, before signing the agreement for loan guarantee you need to evaluate the terms of the loan in addition to the cash flow and financial capability of the third party in order to ensure that he/she will be able to service the debt obligation without default on time.

Further, before taking the additional burden you need to check your credit report to ensure that in the event of default by the borrower you'll be able to service the outstanding amount in a timely manner. Else be ready to confront the legal action.

Some other facets to being a loan guarantor

The Supreme Court order in relation to the loan guarantor states that the guarantor to the loan cannot back out from the commitment midway.

However, if the terms of the loan are changed on the part of the borrower during the term of the loan in respect of the repayment period or he applies for top-up on the existing loan, guarantor of the loan is not held liable to agree with the changed terms and is liable only for the previous terms of the loan.

Loan Guarantee for the third-party loan shows on the credit report of the borrower

Credit report is the comprehensive record of loan account of an individual and the guarantor's credit report also reflects the loan amount guaranteed by him/her.

Additionally, the credit report also shows the status of debt service on a monthly basis by the borrower of the loan. So, the statement all in all would show up the default as well as delinquencies on the loan.

So, a default on the part of the borrower and consequently on your part to service the debt can impact your credit score severely.

To ensure that your credit score is not affected you have not ascertain that debt obligation is being honoured in a timely manner.


Read more about: loan, loan guarantor, banks, credit score
Story first published: Thursday, October 24, 2013, 12:02 [IST]
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