When R P Sharma agreed to become guarantor to his nephew’s personal loan, he didn’t know he was actually shooting himself in the foot, the pain of which would be felt for a long time. Unfortunately, his own children shared the brunt of his mistake. If only he understood his responsibilities as a guarantor before signing his nephew’s loan application, things would be different and far better.
It is often professed, “don’t mix up your money with your emotions”. Sometimes all we want to do is, as a goodwill gesture, extend a helping hand to help one out but often we get dragged into their pits. Mr. Sharma was under the impression that by becoming a guarantor he is only helping his brother’s son get the loan he yearned. After all why should he be worried when he is not the one who is actually borrowing from the bank? He assumed his responsibility was only limited to ensuring timely repayments were made. Alas, when bank officials came knocking his door he got the shock of his life. So would you say it was because his nephew defaulted on payments that led to Mr. Sharma’s misery? No. It was his ignorance that led to his downfall.
Why Do Banks Ask For A Guarantor?
When banks are approached for a loan application, they examine the applicant’s credit history. If they are not completely satisfied, they insist on some form of security. They may either ask for collateral (mostly in unsecured loans such as education loan, personal loan) or a co-borrower or a guarantor. They expect the guarantor to be a person with high creditworthiness.
A guarantor comes with a promise to repay the lender’s loan should the primary borrower fail to do so. He is someone who has “guaranteed” the lender that the loss will be made good incase of default. He assumes a secondary responsibility of the debt and it adds to his personal debt obligations.
What Should You Keep In Mind Before Guaranteeing?
- Every credit institution has own norms on who can become a guarantor. Don’t sign any form if you are not comfortable with any of the clauses in the agreement. Seek legal opinion on the terms thus laid down by the lender. It is critical to soak in every detail of the agreement so that you are aptly prepared for what you are entering into.
- Don’t part with your important KYC documents – identity and address proofs, until you are certain that you understand the nuances of being a guarantor.
- Understand why the borrower is unable to get a loan on own steam in the first place. Ask to see their cibil report to understand how well they have fared their debts in the past.
- Check financial stability of the person before you agree to guarantee a loan. Make sure you have faith on that person’s ability to repay.
- Keep a track of the payments made on the account that you have guaranteed because the details will reflect in your credit report as well and have an equal impact on your credit score as if you are the borrower. Don’t hesitate to persuade the borrower if there is a delay or default.
- It is important to note that if you have guaranteed a loan, then it will be counted towards your open lines of credit and therefore you personal eligibility is hampered. Should there be a default in payments then your score will take a hit too. However, don’t depend on the principal borrower if he/she is a conscientious borrower because their timely repayments will not help your score gain heights.
- If you must, then ask the borrower to arrange for another guarantor as well so the responsibility is shared.
- Don’t get carried away in emotions. It is important to take a practical stance in financial matters.
- Watch out for clauses like what will happen to the obligations of a guarantor should the relationship between the primary borrower and guarantor change, for example in case of divorce, or if the primary borrower dies, for it may not automatically be passed onto heirs.
Based on internal credit policies, institutions gauge overall indebtedness of a person. If you have stood as guarantor to any loan then it will be treated as an outstanding debt liability by the bank because there is a risk of it falling upon your shoulders any time.
Don’t be weighed down by a responsibility to oblige someone. By not standing a guarantor you might stand a risk of losing a friend or a relative. But before you put your own good credit on the line to be a guarantor, examine all “what-if” scenarios meticulously.
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