How to be a Guarantor

Nov 19, 2020
  • When it comes to banking and granting of personal loans, a guarantor plays a very important role in getting the role sanctioned. A guarantor is any person who promises to pay the debt of the actual borrower in case he/she defaults in doing so. In other words, the guarantor pledges his/her assets as collateral in case of default on the borrower’s part while fulfilling the loan obligation.
  • Having a guarantor to take the responsibility of paying if the borrower is unable to, also gives the bank a sense of security while granting the loan.
  • The Indian Contract Act, 1882 governed the provisions of a guarantor. And it shifts the liability of paying the money on the guarantor in case the principal debtor defaults in doing so. The contract of guarantee is explained under section 126 of the Indian Contract Act, respectively.

The criteria of being an eligible guarantor are as follows-

  • The person should be more than 18 years of age. Attaining majority is one of the prerequisites to enter into any form of contract. Hence only people above 18 years of age are eligible to become a guarantor.
  • The person should be of a sound mind and shouldn’t be mentally incapacitated before entering the agreement and signing to be the guarantor. It is also imperative for the guarantor to know that once an agreement is signed, there is no turning back until all the obligations of the loan terminate.
  • The guarantor must have a good credit and loan repayment history, as well as a stable employment situation as these factors will make the person eligible to be able to pay back the loan if the lender fails to do so.
  • The guarantor should also have a decent amount of influence on the borrower so that the borrower does not take undue advantage and let someone else pay the obligations on his/her behalf. Hence in most cases, the guarantors are mostly very close relatives and friends.
  • The guarantor should be having a free will while signing up the agreement as it legally binds him along with the borrower until the loan is fully repaid. Hence another requisite of being a guarantor is free will, without any coercion or undue influence.
  • The guarantor should be able to understand the legal procedures and implications of the entire procedure. Without this knowledge or capacity to understand, the person cannot be an eligible guarantor.
  • Importantly, the guarantor should also be well aware of the details of the loan being applied for, its tenure, the principal amount and the implied interest.
  • The guarantor should also be familiar with the principal borrower’s assets or outstanding loans if any so that the guarantor does not only provide the security to the bank in case of default on behalf of the borrower but can also analyze the risk involved.
  • Before guaranteeing a loan on someone’s behalf, a person should also primarily analyze his/her personal credit scores, financial goals and what the implications of the failure of the principal borrower to repay the loan would bring on his/her personal goals and financial stability.