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In this day and age some people who need a loan, for say a car or other expense, may find that their own credit history will not be accepted by the lenders as a 'good risk'. In these situations the borrower may ask someone with good credit history to be a guarantor for them. It might be difficult to say no directly to a family member or friend when they come to you, hand you a bunch of papers, and simply ask for your signature on the last one, but this seemingly small deed could become an absolute nightmare for a guarantor at a later stage. A guarantor for a loan is someone who is accountable for repaying the loan that the borrower has taken out, so the guarantor is liable for repayment of the loan in case the borrower defaults.

Conditions for being a guarantor

Banks or lenders prefer the guarantor to be someone from the family, but friends or colleagues can also be the guarantor.

Becoming a guarantor for someone is a huge responsibility and the banks or lenders will make sure the guarantor is able to bear that responsibility. For this, the credentials such as income, credit rating and expenses are measured thoroughly. A list of the assets of the guarantor and the liabilities may for some loans also be made. And last but not the least, the guarantor has to sign on the legal documentations on becoming a guarantor.

What are the repercussions?

Credit Report: The lender will normally want to assess teh creditworthiness of both the borrower and guarantor. So for any application for loan or credit from the guarantor it could lead the bank asking to see the credit report of the guarantor. This could become a huge issue if the borrower defaults on loans and the guarantor, when asked, does not make the repayments, because this will be reflected on the credit report of the guarantor also. 

                  Applying for a Loan in future: Unfortunately, when the guarantor agrees to be liable for the loan of a borrower, their own eligibility criteria for loans may come down. Banks take this amount guarantor has taken liability for when considering for a loan application from that person, because they have to keep the scope for defaulted payments of the part of the borrower and they have to ensure the guarantor can pay both if the situation comes down to it.

                  If the borrower defaults: The borrower could be unable to pay the loan for whatever reasons. So banks have a policy to try to recover the loaned amount from the borrower first. If this does not go through, they will send the guarantor a notice asking them to make the missed payments. If this is not paid then they could now take recovery action against either, or both parties.

The guarantor could find some relief if the borrowing happens through organizations such as Amigo loans, who allow late payments to be collected form the borrower. In many ways they act like high street lenders.  Banks are basically business entities and for them non-performing assets are liabilities, so if they cannot get the payable amount of the borrower or the guarantor, they will start action to recover the amount owed. Loan agencies such as Amigo loans have a policy to check up with the borrower or the guarantor over phone or email first to know what has gone wrong with the situation that the payment is being defaulted and they try to make a solution out of it.

Can guarantors revert their roles?

There is no way for a guarantor to revert their role once they have signed on the deed with the bank, unless the bank agrees that they can substitute someone for themselves.

Some banks may have some internal policies for changing the guarantor if reasons comply with their code, but they make sure the alternate guarantor is creditable for the position. In case a situation like this occurs, and one’s guarantor role passes to another, for the first guarantor, liability is frozen for the amount of money till the day that person held the post of guarantor. After that, they are not considered liable for that loan anymore. Banks, organizations such as Amigo loans, they have some internal policies for such change in case the situation is dire for the borrower or the guarantor. But this has to be requested by the borrower, for change of guarantor; only then the organizations could process it. Whatever documents the guarantor had produced before taking the liability will be only given back when the loan is paid in full even if the guarantor changes midway.

So before becoming a guarantor, asses the financial credibility of the borrower and the affordability of the loan for the borrower. Also why the bank needs a guarantor for the borrower should also be taken into account before signing a paper.