Sometimes, you might see your close friend or a relative approaching you to become a guarantor for his loan. The situation then is such that you cannot say ‘No’. However, you should be aware that acting as a loan guarantor is nothing but giving a formal assurance to lender. Also, banks always consider you as good as a borrower of the loan amount.
Factors to consider before signing as a guarantor:
Types of loan where guarantor is a must:
Whenever someone approach you to be a guarantor for the loan, it does not mean that the borrower will always be a defaulter. Banks ask for a loan guarantee only if the amount of loan exceeds certain limit e.g. 5 lakh. This limit differ from bank to bank. Home loan, education loan, vehicle loan etc. could be some good examples. So, before signing as a guarantor, understand that the bank is seeking your guarantee because the amount is high.
Differences between a Guarantor and a Co-borrower:
If you think, the responsibility of a guarantor and the co-borrower is same, then you are ‘WRONG’. Co-borrower holds the same responsibility of the main borrower. However, a guarantor would need to pay the loan only when the borrower/s fails to repay.
Consequences of default by the borrower:
Most of us forget that, a guarantor is not just a ‘witness’ for the loan, he is also liable to repay the loan, if the borrower doesn’t pay. Banks usually wait for 3-6 months before they issue the notice to the guarantor on loan default by the borrower. It is then the responsibility of a loan guarantor clear the debt of the borrower. Keep in mind that banks have all the rights to seek legal action against a guarantor if he refuses to clear the loan of a borrower.
Impact on CIBIL score of a guarantor:
In case of default, banks treat both the borrower and the guarantor in a similar way. One has to keep in mind that when you guarantee a loan, the information is sent to the credit agencies. In a normal scenario it doesn’t impact your credit score. However, it will have a negative impact when the borrower defaults and you are unable to clear his loan as per the guarantee.
Withdrawing as a loan guarantor:
It is very important to ensure the due diligence before accepting the responsibility of a guarantor. That means, you should be very careful in making the decision of becoming a guarantor for any loan. After sometime, if you would like to withdraw as a loan guarantor, then you should obtain the consent from the lender or a financial institution. Well, its a tough task since the financial institution will agree to release you as a loan guarantor only if they get the alternative guarantor for an outstanding loan amount. So, be very careful before you become a loan guarantor.
Documents to be submitted:
Before signing as a guarantor, please understand the terms and conditions very clearly. Also, you need to know the documents required from you. Do not disclose all your financial status when not required. Example: If you want to guarantee a loan of 5 Lakh, then showing the Deposit certificate of 50 Lakh as a proof is not required. It doesn’t harm you anyways, but it is not required to disclose your financials unnecessarily.