Look Before Become a Loan Gurantor its Risky
If you stand as a guarantor for someone’s loan, be it a home loan, education loan or even a personal loan, it means that you agree to be responsible for the repayment of the person’s debt in case of a default. It implies that you are equally responsible for paying off the loan. According to home loan contracts, the liabilities of a guarantor are similar to that of a borrower.
Financial Chronicle gives you a snapshot of the possible situations that could arise if you agree to be a guarantor for someone’s loan and the risks involved.
When does a bank ask for a guarantor? A senior official of Canara Bank said, “We ask for a guarantor for a home loan, car loan and, invariably, insist for a guarantor for a personal loan because it does not have an asset attached and is unsecured. If the borrower has a transferable job, or has a job that involves frequent overseas travel or the loan is applied at a place other than the applicant’s permanent address, then too, we insist on a guarantor.”
Remember, the bank is asking for a guarantor to protect itself from a possible default and to have the means to recover the money it is lending. However, if the value of the property and the net worth of a borrower are very high and the loan availed is too small, then a bank can make an exception by not asking for a guarantor.
Relatives, friends, earning children can become a guarantor for a loan.
How to decide on being a guarantor? The question you should ask yourself is whether you will be able to repay the loan if the primary borrower defaults. You need to check the borrower’s financial capability to pay off the loan. If you are confident that the primary borrower will pay off his loan and not default, then you can opt to become a guarantor. You also need to completely read and agree to the terms and conditions put forth by the bank in their agreement. Remember that your credit standing will get affected and the chances of you getting a loan in the future would be slim if the borrower defaults.
Your chances of getting a loan for yourself may get affected: 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 value when you apply for any loan.
“Banks will check with the Credit Information Bureau India (Cibil) records, which will show the home loan for which a person was a guarantor. Banks also will look into the income to obligation ratio of the guarantor, which takes into account the net salary and the sum total of all the instalments for loans he has taken. If both (the primary borrower and his own) loans can be paid off comfortably, then the bank may approve a loan to the guarantor, otherwise no,” Kamlesh Rao, head of home loans at Kotak Mahindra Bank, said. “If income to obligation ratio is 50-60 per cent, we approve the loan. For example, if the guarantor’s net salary is 1 lakh and Rs 50,000-Rs 60,000 is the sum total of all the instalments for the loans he has taken or guaranteed, then a bank can give him a loan.”
If the borrower defaults: In case the borrower does not pay up his equated monthly instalments (EMIs), the bank issues notices simultaneously to both the borrower and the guarantor.
“For a home loan or a loan for an immovable property as per the provisions of the Sarfaesi Act (the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002), we take action by taking symbolic possession of the property. We try and recover the due from the asset against which a loan has been given. For residual liabilities, the guarantor has to pay up,” said the official of Canara Bank. “For residual liabilities, we file a case in the court asking to attach the personal assets of the guarantor, such as bank accounts, cash as well as property.”
Also, a guarantor will be considered a defaulter, which will get reflected in Cibil records, thus, affecting a guarantor’s ability to get a loan in the future.
In normal course, banks do not ask for a security from the guarantor. However, if the title of the property is defective, then a collateral is taken from the guarantor too.
How many loans can you be a guarantor for? To ensure that one person does not stand guarantor for too many loans, banks have a policy of not allowing a person to stand as a guarantor for more than two loans.
Documents required for being a guarantor: “A bank will want to know the net worth of the guarantor to ensure he has the financial capability to pay for the loan, in case the borrower defaults. Therefore, all ‘know your customer (KYC)’ documents, along with income proof will have to be submitted,” Rao said.
If the guarantor wants to revoke the guarantee: Normally, a guarantor cannot revoke his guarantee. However, if the primary borrower agrees to substitute the guarantor with someone else, the old guarantor can revoke his guarantee.
“If the guarantor does not want to continue to be a guarantor, he can ask the borrower to swap with another guarantor. This will have to be with mutual consent of all the parties involved,” Jaideep Lunial, a certified financial planner, said.
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