Loan Guarantors: Guarantee a Loan at Your Own Risk

Ian C. Langtree Content Writer/Editor for Disabled World
Published: 2010/08/25 - Updated: 2023/11/26
Publication Type: Informative
Contents: Summary - Introduction - Main - Related

Synopsis: A loan guarantor is someone who accedes to be accountable legally liable for the repayment of the borrowers debt in case of default. The borrower's as well as your credit reports will mention that you are a guarantor. If a bank legally recalls the loan, the entire loan amount becomes payable.

Introduction

It's difficult to say no when a relative or a friend asks you to guarantee her home loan. But a mere signature and a bit of paperwork could cost you dear at a later date.

"A guarantor on a loan is someone who accedes to be accountable (legally liable) for the repayment of the borrower's debt in case of default for whatever reasons," says Uday Wavikar, a Mumbai high court advocate.

So, even at the cost of sounding rude, consider what we have to tell you before agreeing to become a guarantor on a home loan.

Main Digest

Who can be a Guarantor?

"Lenders prefer blood relatives, but friends and colleagues can also provide a guarantee," says Kartik Varma, co-founder, iTrust Financial Advisers Pvt. Ltd.

Family, friend or colleague, becoming a guarantor entails a huge responsibility. So, banks will ensure you are able to bear that responsibility. Banks would check your credentials thoroughly on the basis of pre-determined criteria, such as income. Banks would also ask for details of your assets and liabilities along with copies of supporting documents. You would also have to sign a legal agreement.

Future Loan Prospects

Becoming a loan guarantor would significantly reduce your loan-taking capability.

"If someone is a guarantor on a loan, his own loan eligibility comes down than what it would have been if he wasn't a guarantor," says Kamlesh Rao, executive vice-president (mortgages), Kotak Mahindra Bank Ltd.

When deciding a guarantor's loan eligibility, banks would take into account the amount guaranteed to reduce eligibility by that extent.

Your Credit Report Will Show Liability

The borrower's as well as your credit reports will mention that you are a guarantor. Says Arun Thukral, managing director, Credit Information Bureau (India) Ltd:

"A guarantor's report will state so. In fact, for any valid application, the bank can access the guarantor's credit report."

Also, if the borrower defaults on the loan, it will reflect on the guarantor's credit report.

What if a Borrower Defaults?

The reasons for default could be beyond anybody's control: unforeseen financial hardships, unemployment, disability or even death.

Every bank has an internal recovery policy they adhere to. First, the banks would try and recover the debt from the borrower. But, if that doesn't work, you will get a notice next. If the bank decides to recover the funds from you, you will be liable to make the payments.

Abhijit Bose, senior vice-president and head-retail assets, Development Credit Bank Ltd, says:

"When the bank legally recalls the loan, the entire loan amount becomes payable."

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Cite This Page (APA): Langtree, I. C. (2010, August 25). Loan Guarantors: Guarantee a Loan at Your Own Risk. Disabled World. Retrieved May 25, 2024 from www.disabled-world.com/disability/finance/guarantor-loan.php

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