What Happens to a Loan Guarantor If the Borrower Does Not Repay the Loan?

When someone very close to you asks you to be a loan guarantor for him, you may become ready in no time due to a factor of trust. But behind this role of loan guarantor, there exists a serious financial responsibility. Let us understand what it really means and what happens if borrower fails to repay.

Who Is a Loan Guarantor?

A loan guarantor is someone who agrees to take on the responsibility of repaying a borrower's loan if the borrower fails to repay it. This arrangement is formalized by a legal agreement with the bank or financial institution. In this way you would become the safety net for someone else's borrowing risk.

You are not just a reference or a moral supporter in such a case but a backup payer for the lender.

What Do the Loan Guarantor Rules Say?

Mentioned below is the law and banking regulations in this regard and bank recovery from guarantor.

• As soon as you sign as a loan guarantor, you are legally bound to fulfill the repayment obligations if the borrower defaults.
• Banks reserve the right to send legal notices and even initiate recovery proceedings against the guarantor.
• The guarantor's credit score can suffer significantly if the loan is not repaid which may affect his future borrowing capacity.

If the borrower defaults, the guarantor is no longer just a witness to the loan, he will also become an active participant in the debt recovery process.

Can the Bank Ask You to Pay Someone Else's Loan?

Yes, absolutely.

If the borrower misses payments, the bank will,

• Serve notice to the guarantor.
• Lender can begin recovery action which can include legal claims, attaching guarantor assets or initiating collection proceedings.
• May seize any collateral or financial instruments held by the guarantor (if pledged).

This is because you have legally agreed to assume guarantor responsibility when signing the guarantee documents. There is no need for the bank to chase the borrower alone as they can pursue the guarantor simultaneously or even primarily as per the loan agreement.

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Points to Consider Before Becoming a Loan Guarantor

If you are ever asked to be a guarantor, just pause and calculate the risks involved in it by considering following important points,

• Know the borrower well such as their financial habits, income sources, job stability and repayment track record.
• Review the loan agreement in detail, understand how much you are guaranteeing and under what terms.
• Assess your own finances, check if can pay this debt if needed without compromising your lifestyle.
• Check borrower's credit history and any previous defaults.
• Consult a financial advisor or lawyer necessarily if it is a high-value or long-term loan.

Remember, kindness is not just about saying yes. Sometimes, protecting yourself is the most responsible form of support.

When Should you Say 'No' to Becoming a Guarantor?

You must Say 'No' to becoming a guarantor in any of the following situations by controlling your emotions,

• Borrower has a poor credit history: If he's missed payments or defaulted before, you are taking on a risky commitment.
• You do not fully trust the borrower's financial discipline: Being close to someone emotionally does not mean he is financially reliable.
• The loan amount is too large: If repayment would strain your finances or affect your lifestyle, it is very risky to become guarantor.
• Your own credit health could be affected: Default by the borrower can damage your credit score. Loan default consequences may harm your credit score.
• You are planning to take a loan yourself: Being a guarantor adds to your debt profile and banks consider it while lending to you.
• Borrower's income is unstable: Seasonal earners, person with low income or someone recently unemployed may struggle to repay the loan hence you should avoid such situations.

Becoming a loan guarantor is like co-signing someone else's promise. If he breaks it, you bear the cost financially. So before you commit, make sure you are not accepting a financial burden just to help someone out.

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