It may be difficult to say no if a close relative or a friend seeks your help to be a loan guarantor. More than a mere social obligation, acting as a loan guarantor means you are giving a formal assurance to the bank or the lending institution that the borrower will be repaying his/her dues. Hence, before you say yes to become a loan guarantor, check on the below-mentioned essentials to avoid falling into an unnecessary financial trap.

1: Know When Bank Seeks A Loan Guarantor

If you think standing as a guarantor for a loan for someone you know is a mere formality, think again. The consequences of being a loan guarantor can be hard if the borrower defaults. This, however, does not mean you should never act as a loan guarantor. When a bank is seeking a loan guarantor it does not necessarily mean that the borrower is more likely to default. Usually, banks seek loan guarantors when the loan amount exceeds a minimum limit. There are no fixed guidelines and each bank has its own norm when it comes to loan guarantors. Before signing on the dotted line understand the reasons why the bank or lending institute is seeking loan guarantor.

2: Guarantor Is Not A Co-Borrower

A co-borrower and a loan guarantor are often misunderstood by many. A loan co-borrower has the onus of repayment of loan just like the primary borrower. A loan guarantor comes into picture only when both primary borrower and co-borrower are unable to repay the loans and banks feel that recovery is not possible due to any prevailing circumstances.

3: Loan Guarantee Is Linked To Your Credit Score

When you agree to be a loan guarantor, banks will check your financial credentials as per its criteria. You will be required to submit a detailed list of your assets and liabilities. Your Credit Score also plays a crucial role when agreeing to be a loan guarantor. Your own loan seeking capability gets reduced as banks usually offer future loans by reducing the amount guaranteed for a loan. Any defaults or irregular payment cycles of loan EMI by the primary lender will, in turn, impact your Credit Score negatively.

4: Banks Can Seek Legal Action If Guarantor Refuses To Pay

When a loan borrower defaults on a loan, the primary responsibility is to recover the amount from him/her. Usually, in cases such as disability or demise of the main borrower, banks are well within their right to approach the loan guarantor to repay the outstanding loan amount. If you are a Home Loan guarantor, you can request the bank to liquidate the property and recover their dues. As possession of the property and waiting for the sale increases cost of recovery, banks usually seek repayments upfront from the guarantor. A refusal to repay the loan could give banks the right to undertake legal proceedings under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002. As a result, banks can seek attachment of your property to recover its due in extreme cases.

5: It Is Not Easy To Withdraw As A Loan Guarantor

Once you decide and agree to be a loan guarantor, withdrawing from the responsibility is not an easy task. It is therefore essential to take up a final decision to act as a guarantor after due diligence. The process of withdrawing as a loan guarantor requires a go-ahead from both the primary lender as well as the lending institution. The lending institution usually agrees for such a change only if there is an alternate loan guarantor available for the outstanding amount.

Therefore, one should understand the terms and conditions before acting as a loan guarantor. You should negotiate or seek legal advice for any uncomfortable clause. It will also help if you keep a track of the repayments of the loan by the primary borrower.

(The writer is CEO, BankBazaar.com)