PremiumMany have lost jobs or faced salary cuts in the past years on account of lockdowns due to the covid-19 pandemic. Some have also defaulted on their loans if the bank didn't offer them loan restructuring.
If you are a guarantor for an individual who has defaulted, you could land up in trouble.
Lenders generally ask borrowers to bring in a guarantor when the loan amount is high or if the bank is not comfortable with the repayment capacity of the primary borrower.
The guarantor takes the responsibility that if, in any scenario, the primary borrower fails to pay the equated monthly instalments (EMI) of the loan, then the guarantor will assume full repayment responsibility.
If the primary borrower defaults on loan repayment, the liability to pay the outstanding amount falls on the loan guarantor. In case of non-payment, a guarantor is liable to legal action. If the lender files a recovery case, it will file the case against both the borrower and the guarantor. A court can force a guarantor to liquidate assets to pay off the loan.
Even if things don't go wrong, there are other downsides to deal with as a guarantor.
The moment you sign up as a guarantor, your loan eligibility will come down. In case you apply for a loan, lenders will consider the outstanding amount on the loan for which you are a guarantor as your contingent liability and may extend credit to you accordingly.
Besides, the fact that you are a guarantor to a loan will also figure in your credit report. This also means that any default, either by the primary borrower or you, will affect your credit score.
If you are a guarantor for someone who has defaulted, you will have to face the consequences.
It's a best practice never to become a guarantor for someone unless you're willing to assume thrir repayment responsibility if they fail to do so.
(Do you have personal finance queries? Send them to mintmoney@livemint.com and get them answered by industry experts)
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