Why Guarantor for a loan?

[msgforsunil]

Hi All

Why would bank ask for Gurantor on going for a loan, when one would have pledged the land or building documents in original? Generally, the asset worth would be more than the loan amount. Please share your thoughts.


Thanks
Sunil Kumar

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[Rahul]

What is surety or guarantee?
A surety or guarantee, in finance, is a promise by one party (the guarantor) to assume responsibility for the debt obligation of a borrower if that borrower defaults. The person or company that provides this promise, is also known as a surety or guarantor.

Why guarantor is required?
The situation in which a surety is most typically required is when the ability of the primary obligor or principal to perform its obligations under a contract is in question, or when there is some public or private interest which requires protection from the consequences of the principal's default or delinquency. In most common law jurisdictions, a contract of suretyship is subject to the statute of frauds (or its equivalent local laws) and is only enforceable if recorded in writing and signed by the surety and the principal.

If the surety is required to pay or perform due to the principal's failure to do so, the law will usually give the surety a right of subrogation, allowing the surety to "step into the shoes of" the principal and use his (the surety's) contractual rights to recover the cost of making payment or performing on the principal's behalf, even in the absence of an express agreement to that effect between the surety and the principal.

source - wikipedia.org

[msgforsunil]

So, will bank still look for a guarantor, when one has gone for a insurance? Assuming insurance is expected to cover the entire loan amount incase of unforseen death. And I think, none would like to default and only the circumstances would lead to it. For eg. a person losing a job, in such instances, I think bank is gracious enough to understand such situation and accordingly either reduce the EMI or pause the payment till the person gets job.

Any thoughts?

Thanks
Sunil Kumar

[Rahul]

After sub-prime crisis, banks look for more safety, so go for guarantor.

In most common law jurisdictions, a contract of suretyship is subject to the statute of frauds (or its equivalent local laws) and is only enforceable if recorded in writing and signed by the surety and the principal.

In case of fraud bank has only option to get his money back via guarantor. Insurance company won't pay in case of fraud.