While credit worthiness is one of the major reasons a person is asked for a guarantor, it also does not necessarily mean that the borrower’s credit worthiness is being questioned. However, when you sign on the dotted line and agree to become a guarantor, you are legally bound to pay off the debts if the primary borrower defaults.
Amit Saxena (name changed) is a software professional who was asked by his friend to be the guarantor for a loan of Rs. 2 L. Being a very ‘close friend’ Amit agreed immediately. Six months through the loan the friend disappeared without any trace and Amit was left with the substantial burden of paying off the loan.
This could be a situation where you could be caught up. Many of us at one point in time or other have been asked to be a guarantor for a friend’s or relative’s loan. Our answer to the request may have been based on any reason. However, in a culture like ours where we are prone to help our friends and relatives, it is important to understand the pros and cons of being a loan guarantor.
Who is a guarantor?
A guarantor is someone who agrees to be responsible for the payment of someone else’s debt should the latter default on payments. It is important to understand that being a guarantor is not a mere formality to help a borrower obtain a loan. The guarantor is equally responsible for paying off the loan.
When is it ok to be a guarantor for a loan?
Being a guarantor is always risky because you cannot guarantee another person’s behaviour. However, since it is very subjective, the decision to be a guarantor should be based on the knowledge of the borrower’s financial capability to pay off the loan.
When is it not ok to be a guarantor?
If you come to understand that the bank is asking for a guarantor because of it is unsure about the borrower’s repayment capability, it is important to take a close look and understand the borrower’s financial capability yourself.
Is being asked for a guarantor an indicator of the credit worthiness of an applicant?
While credit worthiness is one of the major reasons a person is asked for a guarantor, it also does not necessarily mean that the borrower’s credit worthiness is being questioned. It could be based on other reasons such as:
- The applicant has a transferable job
- The applicant job’s involves frequent travel abroad
- Loan is applied at a place other than the applicant’s permanent address
What can happen if the person who I have agreed to be a guarantor for defaults?
When you sign on the dotted line and agree to become a guarantor, you are legally bound to pay off the debts if the primary borrower defaults. If the borrower does default, then:
- Banks will hound you to clear the debts
- Personal assets such as bank accounts, cash as well as property could be attached (except for provident fund and agricultural land which cannot be attached under any court decree) and you could turn bankrupt
- Your credit standing could get affected; which means that if you need any credit in future, your chances of getting the same could be dim.
Will being a guarantor impact my chances of obtaining another loan?
Yes, it will. Most banks and financial institutions look at the loan that you are a guarantor for, as a loan that you hold. They will therefore deduct that much amount from your loan eligibility. Also, if the borrower has defaulted on some payments during the course of the loan, this also shows up on the guarantor’s credit history. This can additionally reduce your chances of getting a loan.
How should I decide whether to be a guarantor or not?
An important question to ask your self when you are asked to be a guarantor is ‘Am I ready to repay the loan?’ If the answer is yes, go ahead, be a guarantor. If no, then you have to base your decision on a stronger reason than ‘He is a close friend’.
On a final note, if you do become a guarantor, you have to understand that there is no turning back. You cannot revoke your guarantee after the loan has being sanctioned. So, before you do sign the dotted line, check whether the contract tells you the amount you are guaranteeing, the situations in which you will have to repay the loan and if the amount to be borrowed can be increased without you being told.
I am telling you this from my own experience. well, as the article says at the end: “On a final note, if you do become a guarantor, you have to understand that there is no turning back.”
So, my advice to you all is: if you do have that much money, simply donate but never ever loan or sign any guarantee papers for your friends.
If you give and forget, you are happy forever. that way your friends will also be obliged to you forever. if by any chance, your money is returned; in that case too he can not ever forget that you helped when he needed you.
but if you loan or become instrumental to getting a loan by being a guarantor, then you had it. either he is not able to pay in time or pay at all. in that case, you are in soup. bankers will squeeze the juice out of you. if you ask your friend, he either will get unhappy and at times irritated. he will think that you don’t even realise his financial problems. if he had them, he would have paid it. in the end, you pay to the bankers.
so why not pay in the first place.
to end this, let me tell you, “if you do become a guarantor, you have to understand that there is no turning back.”
WISE PEOPLE HAVE TOLD MANY A TIMES THAT man behaves in the most unpredictable way .It is better to have ABSOLUTE FAITH in this statement if we are interested in our safety.Real friendship never depends on money transactions.
Yes i agree with this article ..We would be literally gone if he /she doesnt pay back the loan .. so be careful…end of the day no matter what financial matters pinche’s us a lot than anything else