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Banks and Non-Banking Financial Companies (NBFCs) sometimes ask for guarantors along with loan applications. This condition is usually imposed when banks are not sure that the main applicant and co-applicants (if any) will be able to repay the loan. Sometimes a guarantor is demanded by the bank when the applicants credit score is low or when the loan is applied by the applicant for more than his/her capacity, this condition can be kept even if the age of the applicant is high. But being a loan guarantor comes with its own risks. Let's know how…
1. Payment Liability - In case the principal borrower or co-borrower fails to make loan payments on time, the guarantor becomes liable to pay the outstanding amount. The guarantor will also have to pay penalty, interest and other charges. Therefore, it would be better if you as a guarantor ask the borrower to take loan protection insurance as well.
2. Credit score can be affected - In case of default in loan payment, the credit score of the guarantor will also be affected. In such a situation, if the loan guarantor himself wants to take a loan or credit card, then there will be trouble. Therefore, before becoming a loan guarantor, make sure that the financial condition and credit history of the borrower is good.
3. There will be an impact on the ability to take a loan - When you become a guarantor of a loan, you are also responsible for its repayment. This affects your own eligibility to avail the loan. If you have the capacity to take a loan up to 40 lakhs and as a guarantor you have given guarantee for 20 lakhs loan, then you will be able to get a loan up to Rs.20 lakhs only.
4. It is difficult to withdraw from the role of guarantor - Once you become a loan guarantor, you cannot get rid of that role unless the bank and the borrower find a new guarantor. That's why if you think that this work is easy, then you must remove this misconception.