​​​
  1. Should you become a guarantor? Check out the massive risk involved

Should you become a guarantor? Check out the massive risk involved

While you may be a helping a friend or relative by becoming a loan guarantor, any default by the primary borrower may land you in trouble with serious financial consequences.

By: | Published: December 13, 2017 3:09 AM
who is a guarantor, precautions before becoming guarantor, risk in being loan guarantor By signing as a guarantor for a loan, you are providing a guarantee to the lender that you will repay the debt if the borrower or the co-borrower fails to repay either due to death or any other reason.

While you may be a helping a friend or relative by becoming a loan guarantor, any default by the primary borrower may land you in trouble with serious financial consequences. By signing as a guarantor for a loan, you are providing a guarantee to the lender that you will repay the debt if the borrower or the co-borrower fails to repay either due to death or any other reason.

Moreover, if the borrower defaults, the guarantor will not only be liable to pay the amount but also his credit score may take a hit as the information on the loan guaranteed will reflect in the guarantor’s credit report.

So, before you sign on the bank documents as a guarantor, do understand the nature of the guarantee and seek advice on the legal implications. Sign as a guarantor to only those people who you know are financially sound and will be able to repay their loans. Also, if you find any clause of the bank unacceptable, discuss it with the lender and do keep track of repayment with the borrowers so that you are aware whether the loan is being repaid in a timely manner or not.

Why banks ask for guarantors

Banks require one or two guarantors for home, education or vehicle loan, which are of higher amounts. Banks insist on guarantors if the loanee has low credit score or if the loan amount is above the minimum limit. The guarantors are required to meet the norms specified by each bank and each bank will have its own guidelines if a borrower is not able to get a guarantor. In such cases, they may ask for additional security or the loan to have a joint applicant.

Typically, state-owned banks ask for a guarantor who is a government employee for an additional security layer. Experts say it is always advisable to speak with the bank concerned before becoming a loan guarantor for someone if the person himself is planning to take a loan. Banks usually reduce the loan eligibility to the extent of guarantee. However, each bank has its own credit policy depending on the overall debt burden including the loans that the person has guaranteed.

Guarantors for housing loan

In case of a housing loan, the bank will pledge property of the borrower. In case of a loan default, if the bank is not able to recover the amount from the borrower, then it will ask the guarantor to pay to make up its loss. Usually, a few months after the default on repayments, the bank will issue a notice to the guarantor. It will then become the sole responsibility of the guarantor to pay off the remaining loan amount. In case, the guarantor doesn’t repay, he will also be considered as a willful defaulter.

Guarantors in education loan

In case of education loan, banks may not ask for a guarantor if the amount is below Rs 4 lakh. In case of higher loan amount, one needs to have a guarantor. If the loan amount is above Rs 4 lakh and up to Rs 7.5 lakh, a collateral in the form of a suitable third-party guarantee is taken. For loans above Rs 7.5 lakh, banks take collateral security of a suitable value or a suitable third-party guarantee, along with the assignment of the student’s future income for payment of installments.

However, the bank may waive the third-party guarantee if satisfied with the net worth of the parent who is executing the document as a joint borrower. In case the loanee fails to repay the loan, the guarantor will have to clear the debt. In some cases, the bank requireS the guarantor to have a net worth or annual income equivalent or more than the education loan amount. Before becoming a guarantor for education loan, check which college the borrower has selected for admission. It is easier for an IIM or IIT graduate to pay up the loan than someone from a lower ranked institution.

Impact on credit score

Any default on the loan on which one stands as a guarantor will reflect in his credit score poorly. When one guarantees a loan, the information is sent to credit reporting agencies like CIBIL. While being a guarantor will not impact one’s credit score, in case of default from the borrower, the guarantor’s score will fall and will impact him if he wants to take a loan himself.

Banks can access one’s credit data from the credit information agencies even if one does not have any relationship with the bank. So, before you sign the paper for guarantor ensure you know the person well enough, his income and repaying capacity.

Get live Stock Prices from BSE and NSE and latest NAV, portfolio of Mutual Funds, calculate your tax by Income Tax Calculator, know market’s Top Gainers, Top Losers & Best Equity Funds. Like us on Facebook and follow us on Twitter.

  1. No Comments.

Go to Top