However, as security, most lenders, banks demand a loan guarantor in case of availing a loan. Most people make promises to become guarantors without understanding the nature of the risks associated with that kind of role.
Many individuals remain worried about one thing: “Will the bank recover the entire loan amount from the guarantor once the borrower fails to pay it back?” Well, if you are trying to act as a guarantor, then there are certain issues that you should know concerning rules and liabilities, because avoiding any financial distress later is beneficial.
Roles of a Loan Guarantor
The banks will be assured by the guarantor that someone else will have to repay the loan if the borrower defaults further on the loan. While this helps the borrower to get funds, the weight of it all is really on the guarantor.
When Does the Guarantor Assume Responsibility?
Initially, the bank will seek repayment from the primary borrower. But if such a borrower becomes a defaulter in EMIs or does not pay the required amount after some time, the bank will take the course of the guarantor. Concerning a few essential situations, a guarantor could incur liability:
- Inability of the borrower to keep paying EMIs.
- The borrower declares insolvency, or the whereabouts of the borrower are unknown.
- The collateral (if any) is not adequate to cover the outstanding amount of the loan.
Will the Guarantor Have to Repay the Entire Loan Amount?
The extent to which the guarantor is liable does not always mean that he has to repay the entire loan amount, contrary to common belief:
Type of Guarantee – If you are signed as a limited guarantor, your liability is limited to a certain amount. However, an unlimited guarantee puts you in full responsibility. LoI Terms and Conditions – The bank can only recoup the sum as per the signed contract. The bank now must try to recover from the borrower before tagging in the guarantor.
What Happens if the Borrower Defaults?
- The bank will send a legal notice to both, that is, the borrower and the guarantor.
- In case of any such happenings, the borrower does not respond, the bank may go ahead with recovery proceedings like collateral seizure or file a lawsuit.
- This would also have an impact on the guarantor’s credit score if the loan turns into an NPA (Non-Performing Asset).