Is the person worthy of your trust? Is he or she capable of repaying the loan? These questions should cross your mind before you become a guarantor to someone’s home, car, education or personal loan.
It’s good to stand by the people you like and love. It’s also good to help out friends in need. But please do a reality check before you sign on the dotted line.
On the face of it, you might find these questions irrelevant or insignificant. After all, you are only a guarantor and not the loan seeker. But what you don’t know is that in the eyes of the law, you are as good as the principal borrower for whom you have stood as a guarantor. And should disputes arise, you too will have to face the consequences along with the borrower.
With the number of loan defaults rising, it has become increasingly important to understand the repercussions of being a guarantor. You need to realize that being a guarantor is a big responsibility. It is like agreeing to the fact if the actual borrower does not pay, you will.
According to Harsh Roongta, Former CEO, Apnapaisa.com, you should ask yourself if you are willing to borrow from a bank in your personal capacity and lend to the person. “That is the amount of risk you need to look at. Normally, people don’t think twice before signing on as a guarantor but they should.”
Another angle which you may not be aware of that you will be listed as defaulter in case your friend defaults for which you are a guarantor. As the database maintained by the Credit Information Bureau of India Pvt. Ltd. (CIBIL) not just records information of the borrower but also of the guarantors to a loan. Based on the credit report given by CIBIL banks decide on his loan eligibility using this information. This report not only mentions all your borrowing details but also the loans to which you have stood as a guarantor.
Banks provide CIBIL with the data on a customer as soon as they give out a loan. In turn, they can obtain the details of the amount that an individual has borrowed from other banks, the amount overdue (if any) and the period for which it was overdue.
Herein lies the catch for a guarantor. According to Mr. Roongta, the loan for which you have stood as a guarantor will be treated as a loan taken by you. “Hence if you in your personal capacity want a loan, your ability to borrow would be reduced by that extent,” he says.
Don’t be surprised if inspite of your good credentials, you are denied a loan which you desperately need. Matters get worse if the person you stood as a guarantor defaults. As you could be asked to cough up the amount overdue. If you don’t, you are also considered a defaulter and CIBIL takes a note of this.
In case of a default, the bank first issues a notice to the borrower. If the borrower does not respond to this notice, a second one goes to both borrower and guarantor. If the borrower still doesn’t pay, a legal notice is sent to both the borrower and the guarantor.
To ensure that one person does not stand guarantor for too many loans, some banks have a policy wherein an individual is not allowed to stand guarantor for more than two loans.
If as a guarantor, you fail to clear the amount overdue, you will be in the bad books of the bank, which could deny you credit in the future.
Besides being a guarantor, if you are a borrower for another loan, further heartache awaits, should your friend default? This is especially tricky in case of home and vehicle loans. If you have paid off your loan but your friend hasn’t, the bank could withhold the no-objection certificate for your loan, which you might have cleared.
So before you sign on the dotted line, take a note of all this.