Don’t Sign as a Guarantor until You’ve Read This!
To be or not to become a guarantor is a personal decision. But there are some practical sides to this decision. Don’t be blind to them; otherwise you may find yourself in a mess for acting as a good Samaritan.
Before becoming a guarantor, learn what becoming a guarantor means and your obligations in case the borrower defaults.
What does becoming a guarantor means?
When you become a guarantor, you say two things to the lender:
- I attest the authenticity of the borrower
- I guarantee the borrower will pay the loan (In other words, if the borrower doesn’t, I’ll pay)
All loans do not require a guarantor. However all house loans and education loans do require a guarantor, as do loans with a high borrowed amount. Some loans with exceptionally high loan amount may even require signatures of two guarantors.
What happens when the borrower defaults?
Your trouble starts (to put it all too plainly).
Because you guaranteed that the borrower will pay and he hasn’t, the lending institution will ask you to pay the loan.
Remember, from a bank’s point of view, the responsibility to pay the loan in such a case lies solely with the guarantor. In case of a default, you can expect a notice from the lending institution asking you clear the loan.
What’s more, in case of a default, your CIBIL score takes a beating, affecting your ability to raise a loan for yourself in future.
Why a guarantor’s CIBIL score is affected in case of a default?
A financial institution makes no distinction between a borrower and a guarantor. When a borrower doesn’t pay, the guarantor too is seen as a willful defaulter, and quite naturally, then, the guarantor’s credit score also take a hit.
A low CIBIL score, in turn, limits financial opportunities available to you. You may no longer be eligible for a loan or, if you are, you may be asked to pay higher interest rates and charges.
What you should know before signing on and becoming a guarantor?
Don’t sign unless you’ve learned the following four things:
- Borrower’s capability to pay
Evaluate the capability of the borrower to pay the loan. For instance, if you are becoming a guarantor for a house loan, check borrower’s monthly income and present savings. Similarly, in case of an education loan, check the college to which the borrower is applying. It is much easier for a graduate from a top-level institution, like IIM, pay the education loan than someone graduating from an average college.
- Your liability in case of default
Contact the bank to get this information. In case no information is forthcoming, you can safely assume that you will liable to clear the loan in case of default.
- How will it affect your loan application in future
You know your capability to raise a loan will take a hit if you become a guarantor and the borrower runs away. But did you know that just becoming a guarantor may affect your future loan applications?
Let’s assume you have taken a loan of Rs 40 lakhs and are a guarantor on another loan of Rs 30 lakhs. Some banks may take both loan amounts in account when they evaluate your loan application. However, banks have discretionary powers here and have their own rules about this. If you are planning to take a loan yourself in future, check with the bank you’ve in mind how becoming a guarantor will affect your loan application.
- Documents you need to submit
You should provide only those documents that you are asked to submit. While providing additional information about yourself will not cause harm, but there is little sense in sharing unnecessary details about your finances with a financial institution.