December 17, 2010 / 8:33 AM / in 8 years

Planning to be a loan guarantor? Be informed

What if you are approached by a close friend to become their loan guarantor? Would you say yes without question or would you analyse the situation objectively before making your decision.

A labourer works on the sign of a bank building in Ahmedabad November 26, 2010. REUTERS/Amit Dave/Files

In money matters objectivity is critical, so we would advise you to opt for the latter. Read on to know more about being a loan guarantor and why you should think twice

IS BEING A LOAN GUARANTOR SUCH A BIG DEAL?

When you are a loan guarantor for an individual’s loan it means that you agree to be responsible for the repayment of another individual’s debt in case of a default. It implies you are equally responsible for paying off the loan!

SO, SHOULD I NEVER BE A LOAN GUARANTOR?

When you provide guarantee for another individual’s debt, it definitely comes with its risks!

A key deciding factor will be to gauge the borrower’s financial capability to pay off the loan.

You also need to evaluate objectively whether the borrower can honour such a commitment and not leave you to face the lone battle of paying up their dues in case of a default.

If you are confident on both these counts, then you can opt to become a guarantor but not before you completely read and agree to the terms and conditions put forth by the bank in their agreement.

AM I BEING APPROACHED BECAUSE THE APPLICANT HAS A BAD CREDIT HISTORY?

While the lack of a good credit record ( past repayment track record of previous loans, credit card payments etc.) could be a possible reason for a bank to ask for a loan guarantor, this may not always be the case. It could be based on other reasons such as:

* The borrower has a transferable job,

* He has a job that involves frequent overseas travel

* or the loan is applied at a place other than the applicant’s permanent address etc.

If I choose to become a loan guarantor and the borrower is unable to repay, then what happens?

When you sign on the dotted line and agree to become a guarantor, you are legally bound to pay off the debts if the borrower defaults. If the borrower does default, then:

* The bank will approach you for clearing the debts

* Personal assets such as bank accounts, cash as well as property could be claimed (except for provident fund and agricultural land which cannot be attached under any court decree) and you could turn bankrupt

* Your credit standing will get affected and the chances of you getting a loan in the future would be slim.

WHY SHOULD MY CHANCES OF GETTING A LOAN IN FUTURE BE AFFECTED, WHEN I DID NOT TAKE THE LOAN?

It does not matter! 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.

IF I AGREE TO BECOME A GUARANTOR, WHAT ARE THE ASPECTS I SHOULD LOOK OUT FOR?

- The bank or lending institution is asking for a guarantor as a means to protect itself from a possible default and have the means to recover the money it is lending. Be aware that the bank can file a case against you and lay a claim to your assets for loan recovery.

- It all boils down to what the contract binding you to be the loan guarantor dictates.

Hence, check whether the contract indicates the amount you are guaranteeing, make sure it does not exceed a specified limit that is agreed upon between you and the bank, else there might arise a situation where you will have to repay the entire loan in instances where the credit limit is increased on the initial loan borrowed.

- The terms and conditions should be clear and precise. Also, you need to make sure there are enough safety clauses in place that ensures you are protected to some extent against certain eventualities.

For instance, the notice period that is available before the bank approaches you in case of a default should be clearly specified.

Also, make sure you are not held liable if the original loan agreement is changed at a future point in time without you being aware of it.

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