Loans come in various sizes and for various purposes. When the loan involves a higher amount, then banks or other lenders may ask for a third person to sign the loan application as a guarantor. There are many different interpretations of the word and the implications of being a guarantor. So we bring in this article to clear the air around rules for a loan guarantor.
A guarantor for a loan can be any person who agrees to take up the responsibility of any other person’s debt. By being a guarantor, the third person gives his consent to pay back the loan of the person who is availing the loan. The guarantor will need to pay back the loan, in the event of the borrower not being able to pay back the loan due to any reason. Here it is important to understand that, a guarantor is different from the witness who signs on the loan documents.
There is no categorization of loans for which a guarantor is required. It is based on the rules and regulations followed by individual banks. Generally, guarantors may be required for loans over Rs 5 lakhs. This may also vary depending upon the credit score and other factors such as employment, residential status, etc.
For Example: When giving out a loan to an NRI, bankers may insist on getting a guarantee as the applicant is not based in India. Similar may be the case for a person with a low credit score.
RBI allows the banks to frame their guidelines for loans that require guarantors and their treatment. As said earlier, this depends on the various factors like creditworthiness of the applicant, his income, employment and residential details.
The guarantor is responsible for the repayment of the loan in all the cases when the borrower or the co-borrower or both of them together are unable to pay back the loan. This could be due to any reason like the death of the borrower, loss of his/her job/ a medical condition, etc. But, it is good to know that the responsibility of the guarantor does not come up immediately when the borrower stops making payments. The banks or the lender waits for some months and gives time to the borrower to make the payment. In spite of all the efforts, if the borrower does not make the payments, the bank then issues notice to the guarantor to bear the responsibility of making the loan repayment. But, the RBI has allowed the banks to ask the guarantor to pay up the amount even before exhausting all the available remedies against the principal borrower and co-borrower. In case, the guarantor does not make the payment of the loan EMIs in spite of having the funds at his disposal, then he will be considered as a wilful defaulter. This can have further repercussions on the credit score of the guarantor.
The first and the foremost thing that anyone providing a guarantee should understand is that the guarantor is as responsible as the borrower to make repayment of the loan. The need to pay back may come due to emergencies and contingencies which the guarantor is totally unprepared for.