Who is a Loan Guarantor? What are Their Obligations?

When it comes to loan approvals, the banks take all kinds of measures regarding the borrower to minimize the credit risks. They check the income documents, assets, credit history, and more. However, when documents don’t suffice, then they may also ask for a loan guarantor.

Who is a Loan Guarantor?

Image Source

A loan guarantor is someone who gives a pledge of legal binding for the repayment of the borrower’s loan amount. In other words, they take the responsibility of the borrower’s loan repayment.

A loan guarantor can be of two types:

Financial loan guarantor
As the name suggests, a financial loan guarantor is a person who takes the financial responsibility for the borrower’s loan repayment. Thus, they are liable for repaying the loan amount if the borrower defaults.
Most banks want a financial loan guarantor when the loan amount is high. This is, thus, commonly seen in higher education loans, property loans, etc.

Non-Financial Loan Guarantor
A non-financial loan guarantor is a person who is not financially accountable for the borrower’s repayment but still bears the responsibility for the same. They are usually the contact person if the borrower is inaccessible or not repaying the loan.

Risks of Being a Loan Guarantor

When a person becomes a loan guarantor they agree to certain risks even if they are a non-financial loan guarantor. These are:

•  Credit damage: If the borrower defaults, then naturally their credit score is hurt. However, the same applies to their loan guarantor as well.
• Loan applications: If a loan guarantor wants to apply for a loan for themselves but the person they have become a guarantor of hasn’t repaid their loan yet, then the bank may not approve their loan as well.
• Assets Risk: Under the ‘Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002′, a bank has the authority to seize a loan guarantor’s property if the borrower fails to repay their loan.