To be a loan guarantor is like sailing on a boat that might have a hole. There is a major risk of ruining your credit for the other person. As, when you become a loan guarantor, you basically become responsible for the repayment of the third party debt in case of a default.
It is thus imperative to be very confident of your decision to become a loan guarantor. As a guarantor you play as a safety guard for the bank. The bank always want to ensure that the money they lend is safe.
Usually a bank looks for a guarantor(s) in following situations:
- When the prospect has a bad history and bank assumes that s/he may fail to pay back the obligation. When you have already failed to pay back your EMI, credit card bill or other outstanding in the past, you are looked upon as a risky prospect. A signature of a guarantor shares that risk for bank.
- When you have a job that doesn’t let you reside in a same city for long and you keep on moving from one city to another. The bank looks for a guarantor to certify your credentials.
- Likewise, when you apply for loan at another address and not at your permanent address, the bank may ask for a co-signatory or a guarantor for loan.
In all these cases, you can get easy personal loans when another person with a better credit history is ready to share the loan responsibility. However if you decide to become a loan guarantor it is very important that you try to evaluate if the borrower would be able to meet their obligation. You need to thrust complete trust on them that they would not put you in trouble by not paying back their dues.
In fact you need to take certain precautions to ensure that you do not fall pray by signing as a guarantor.
- Study all terms and conditions very carefully before you agree upon the guaranteeing agreement. All clauses should be precisely clear to you. There should be enough exit or safety clauses in the agreement. For example, you shouldn’t be liable for any changes in loan agreement, such as change in credit limit, without your knowledge. Clearly know about the notice period bank would serve before the recovery action.
- Know clearly about the nature of guarantee you are going to offer and what the legal implications are, in case of the default.
- Access your financials first. When you become a loan guarantor, your credit limit falls. When in future you would apply for loan or credit card, a lending institution would simply reduce guaranteed loan amount from your credit eligibility. So make sure you do not fall prey when you need fund for your own life goals. Being a guarantor is like carrying additional debt burden on your shoulders.
- In case the borrower defaults, the bank would claim debts from you. So, in order to recover the loan, the bank can even start a legal battle against you. All your personal assets including your hard earned cash at bank and property is at risk. To add up to your financial woes, your credit worthiness may touch rock bottom. Your ability to get loan in future would dive down and you would need to learn ways to improve credit score fast.
- Default in this loan by the borrower would show up in your credit report. Everything regarding this loan will be reported by CIBIL.
- Besides ensuring that the borrower is genuine and capable of paying off loan, you might even need to counsel them or re assure periodically to complete the loan on time. You would always need to ensure the monthly payments are met regularly as it will appear in your CIBIL report.
- Never share your personal documents such as ID or passport with anyone, not even the borrower unnecessarily. Submit the required documents to bank only.
Despite all these precautions, sometimes you might find yourself under a howling situation wherein whole responsibility of loan default falls on you. Although it is not a cakewalk to shy away from this responsibility you can still send an application to the bank for dismissing your position as a guarantor. The final decision will however stay with the bank and a long legal battle might await for you ahead.
Thus, always try to calculate all pros and cons constructively before you become a loan guarantor.