Banks are always forthcoming while giving loans to a borrower but if the loan amount is beyond the borrower’s repaying capacity it will ask for guarantees. In that case, a bank will only agree on granting the loan, if a loan guarantor guarantees the loan amount.
A loan guarantor is a person who agrees to be accountable for the repayment of the borrower’s debt in case of default. If you are signing up as a guarantor, then you are providing a guarantee to the bank that you will repay the loan amount if the borrower fails to repay either due to death or any other reason.
What is the eligibility of becoming a home loan guarantor?
To become a home loan guarantor, you must fulfill the below general criteria:
- You must have a good repayment history and should not have applied for bankruptcy ever before.
- You must be capable of paying the home loan EMI payments in case the borrower defaults.
- You must be in perfect mental capacity and be able to understand the terms and conditions of the loan before signing the agreement.
- You must have sufficient influence over the borrowers so that you can influence them to make payments in time throughout the tenure.
What are the risked involved in becoming a loan guarantor?
If you are becoming a loan guarantor, chances are that it may hurt your future loan prospects. When you become a guarantor, the bank will reduce your eligibility to the extent of the guaranteed loan amount.
For example: if you have become a loan guarantor for a home loan applicant whose home loan amount is Rs.50 lakh, and after some years, you are applying for a loan for Rs. 60 lakh. Now the bank, while sanctioning the loan, will calculate your home loan eligibility and will sanction only the balance amount, which is only Rs.10 lakh.
Even your credit score can get affected when you become a loan guarantor. The amount guaranteed by you will automatically reflect in your credit score and can reduce your eligibility for a home loan. If the borrower defaults on the repayment, even that will reflect on your credit score report.
After becoming a loan guarantor, if you wish to cancel it, then you must request the borrower to initiate this request to the bank. Only after that, the bank can cancel your guarantee. But this is possible only after getting a new loan guarantor. Also, some banks do not even allow the change of guarantor.
While we are not discouraging you from become a loan guarantor but before trying to help out a home loan applicant. This is because any default from the borrower will land you into financial trouble. So before you sign the dotted line, do a thorough check for whom you’re making the guarantee, type of loan, terms and conditions of the loan and whether you are capable of paying the EMI in case the borrower defaults.