“Would you like to be a loan guarantor for my personal loan?”- Asked Rishabh to Karan. Karan was skeptical at first. He had known Rishabh since they were toddlers in the same kindergarten. While Rishabh had become a Biotechnologist working in Bangalore, Karan had relocated to Chennai to work in the IT sector. They had rekindled their friendship, just a year ago, over Facebook and a shared love for smartphones.
Upon asked the above question, Karan fell into deep thought. He knew nothing of Rishabh’s past credit repayments. He also did not want to be responsible for somebody else’s credit responsibilities. So what does Karan do next?
Who can be a loan guarantor?
A loan guarantor is someone who acts as a co-signee for a loan. He/she pledges his/her own assets or services to the credit institution, if a situation arises where the main applicant might default in his loan obligations. A guarantor pledges to repay the loan on behalf of the applicant. The guarantor has to furnish his/her details of income, as well as information about assets and liabilities. Many banks insist on one or two personal loan guarantors. The guarantors have to meet the norms specified by the banks. A guarantor basically provides a security, on behalf of the borrower, to the bank.
How can a loan guarantor be eligible?
It is surprising to know that with regards to nomination of guarantors, banks do not have a uniform set of guidelines. Individual banks have the right to decide upon the requirement of the loan guarantor. Each bank has its own policy and usually requires one or two guarantors for larger amounts. For Rs.5 Lakhs and upwards, a loan guarantor is required. It also depends on the credit history and repayment capacity of the borrower. Majority of times, the loans that require guarantors are for education loan, home loan and other loans – where the amount to be disbursed is high.
How to know you should be a guarantor or not?
Karan’s dilemma was genuine. If he did not agree, he could hurt Rishabh’s feelings. Although, Rishabh held a good job and appeared to be a risk free potential borrower, Karan had no idea what Rishabh was up to during the time when he had no contact with him. In case, if he does agree to become a loan guarantor, this is what he needs do before and after.
Know the borrower well
A most obvious tip is to know whom you are guaranteeing for. If possible, learn about the borrower’s repayment capacity. Also ensure that you yourself have the repayment capacity – in case the applicant defaults.
Care with documentation
Make sure you read and understand all the terms and conditions mentioned in the loan agreement. Check if the amount is okay, and is mentioned clearly and correctly. Be careful, when providing the credit institution with details about you. This could be photographs or self-attested photocopies.
Keep track of repayments
Ensure that you collect the repayment proofs from the borrower. It is good to keep track of all the repayments being made. This will also maintain trust between the borrower and yourself.
How is it different to a Co-Borrower?
A co-borrower is a direct borrower, which means that he/she has the same responsibility as the primary borrower. If the primary borrower defaults, and possibly absconds, then the credit institution will pursue the co-borrower who is equally blamed for the entire default. The guarantor is someone who signs the loan contract and agrees to pay in lieu of the borrower or co-borrower, if the borrower fails to satisfy their credit obligations under the loan contract.
In simple terms, the primary borrower and co-borrower hold joint primary responsibility to pay the debt, whereas, the loan guarantor has the secondary responsibility towards the borrowed debt. In case of defaults by the primary and co-borrower, the guarantor bears full responsibility of paying-off the entirety of the loan. A co-borrower’s financials and credit score are checked by the institution towards loan eligibility.
What are the risks faced by a loan guarantor?
A guarantor, on any secured loan, is equally responsible to ensure the repayment of the loan. In case your friend, colleague or family member (who availed the loan with you as the guarantor) fails to repay the loan then you have to honor the repayment obligation on their behalf. The information pertaining to the guaranteed loan will appear on the accounts section of your credit report. Therefore, in case of any defaults or late repayments, you will have to get after the borrower and persuade him/her to repay. In case, of any financial difficulties faced by the borrower, you will then have to contact the bank to restructure the settlement contract only if the bank agrees for such a restructure.
Your credit score is like your passport for getting credit. In case, of applying for an unsecured personal loan with a digital lending platform such as Loan Singh, your credit score is the key criteria that can get you the personal loan approved. In case, there is a record of a late repayment or a default for a loan wherein you were the guarantor, then Loan Singh will reject your personal loan application just because you were a guarantor for a past default. Your credit information is available with credit bureaus, so don’t be under the illusion that nobody would know what transpired with your credit history.
How to quit being a loan guarantor?
Sensing Karan’s doubt on agreeing to become his loan guarantor, Rishabh shows Karan the successful payment of his vehicle loan. This relieves Karan of any insecurities and he agrees to become a loan guarantor to Rishabh’s home loan.
Banks usually wait for a few months before issuing a notice to the guarantor, in case of defaults. But sometimes, much before the defaults, you might notice irregularities in repayment or the borrower in duress, so you may decide to get out of the loan agreement with the bank as a loan guarantor. In case of defaults, the bank treats you as willful defaulter unless you and your lawyer don’t come-up with a solution.
In case, if you get to know that the borrower has availed another loan over the original amount that has been sanctioned, without your consent, you can then ask the bank to relive you as a loan guarantor for the second loan. You will however be liable to repay the outstanding on the original amount that is sanctioned.
You can approach the bank with an application to release you as the guarantor, if there is a substitute ready to guarantee. If the bank is convinced with the substitute, then you may be released. Your credit score remains intact as the loan is deemed closed in the records.
Signing as a guarantor allows the bank to hold onto some of your tangible assets. In case of a default, the bank will auction the same to recover the outstanding amount. But suppose your asset is under mortgage or under construction, you can fight your case in court saying it needs to be fully paid for first. A default will get you tagged as a ‘willful defaulter’ on your credit score. You can also approach the court and argue that when you had signed-up as a guarantor, there were no signs of the borrower defaulting. So, just because the borrower has defaulted now, does not mean you have too.