Risks of being a loan guarantor

In an online chat with Get Ahead readers Harshala Chandorkar of CIBIL answered their queries on risks associated with guaranteeing loans.

Here is the unedited chat transcript:

Amit Shellar: I am a loan guarantor for my friend's home loan? What are the risks that I face?

Harshala C: A guarantor on any form of loan is equally responsible to ensure the repayment of the loan. A guarantor pledges to repay a loan on behalf of a third party who has taken the loan. Hence, he provides a guarantee to the lender, that he will honour the obligation, in case the principal applicant is unable to do so.

In this case, if your friend does not pay the installments, the bank may ask you to pay. You must also remember that the information on the loan that has been guaranteed appears in the accounts section of the guarantor's credit report.

Sonal: Any dos and don'ts fo guaranteeing loans ?

Harshala C: Before you guarantee a loan, keep the following things in mind: • Read and understand the nature of the guarantee. A prospective guarantor must not sign a document that he has not read or sign a document which is in fact a blank form or a partially completed form. You may seek legal advice on the legal implications of the guarantee before signing

• Do not sign the guarantee if you are not clear or uncomfortable with any of the clauses• Be cautious about giving a photocopy of your identity card or passport to anyone other than the financial institution

• Ensure that you keep a track of the repayments of the loan as this loan will also get reported in your credit report

Vinay Shukla: Why do banks require guarantors? Mostly PSU banks need not Pvt sector banks. why?

Harshala C: Many banks insist on one or two personal guarantors. The guarantors are required to meet the norms specified by each bank. The guarantor basically provides a sort of security on behalf of the borrower to the bank, that in case the borrower fails to repay the loan amount or other dues to the bank the guarantor will make good that shortfall.

Gunjal dhage: why do banks need guarantors? what else can a borrower do if he doesn't have somebody who can act as a guarantor or co-borrower?

Harshala C: Many banks insist on one or two personal guarantors. The guarantors are required to meet the norms specified by the bankThe guarantor basically provides a sort of security on behalf of the borrower to the bank, that in case the borrower fails to repay the loan amount or other dues to the bank the guarantor will make good that shortfall.

Each bank will have its own policy if a borrower can't arrange for a Guarantor. Its best to speak with the bank in such a situation to understand what can be done. They may ask for additional security or the loan to have a joint applicant.

Jaykar Kajale: What happens to the guarantor if the person who took the loan defaults on it?

Harshala C: A guarantor on any form of loan is equally responsible to ensure the repayment of the loan. A guarantor pledges to repay a loan on behalf of a third party who has taken the loan. Hence, he provides a guarantee to the lender, that he will honour the obligation, in case the principal applicant is unable to do so.

Manasi Nath: How do i know if I should guarantee a loan or not

Harshala C: When you agree to guarantee someone else's loan, you must ensure that you know the person well. This person has the financial ability to repay the loan. Incase of defaults you may have to repay the loan, so make sure that you can take the additional debt burden.

dananjaypuri: How do I get out of a situation in which my wife for whom I had been a guarantor defaulted on her loan. we have divorced now but the bank is harassing me for that loan and threatening to report me to the credit bureau.

Harshala C: When you stood a guarantor for a loan taken by your wife, you and your wife must have signed a contract with the bank to that extent. Your divorce decree would have listed the obligations and who will be responsible for the payment. If yes, ask the bank to remove your name as a guarantor. The bank will otherwise report both the borrower and the guarantor as a defaulter if EMIs are not paid.

Jeswal: What is the bank's benefit in asking for guarantors if the latter too fails to repay the loan amount in case the main borrower defaults?

Harshala C: The guarantor basically provides a sort of security on behalf of the borrower to the bank, that in case the borrower fails to repay the loan amount or other dues to the bank the guarantor will make good that shortfall.

alex: what can go wrong with being a co-borrower? what are the risks involved? My brother wants me to make a co-borower fro a personal loan?

Harshala C: As a co-borrower you will be equally responsible to make repayments if your brother does not pay.

hiten shah: My sister took a home loan and i became guarantor without actually knowing the exact terms and now the bank is asking me to sign some legal documents of 100 RS judicial paper and also they are asking for my bank account no. from which they can debit the EMI if my sister fails to pay the EMI.. is this preocedure right ?

Harshala C: When you agree to become a guarantor you will be asked to sign an agreement and incase the borrower does not pay the bank will ask the gurantor to pay. Please check the terms and conditions of the gurantee agreement.

romil: Does the bank usually reduce your eligibility to the extent of guarantee you've stood for since that liability can be shifted to you in case of default by the original borrower.

Harshala C: Each bank has its own credit policy to decide the loan eligibility. Generally they will look at the overall debt burden including the loans that they have guaranteed.

vaishali: I would like to be a co-borrower for the personal loan my sister plan to take for her wedding. How shall I go about it? What precautions must I take?

Harshala C: Your sister and you will have to apply for the loan as co-borrowers. The bank will ask for the mandatory documents to be submitted. They will also check your sister's and your CIBIL report and Score and decide on the loan eligilibility.

You must ensure that you have all the necessary documents in place before applying for a loan. You should also check your sister's and your own credit report to ensure that there are no discrepancies in your report.

vijay: What;s the difference between being a co-borrower and being a bank guarantor of loan? What kind of risks face both these people?

Harshala C: A co-borrower is a direct borrower, meaning that the individual has the same responsibility for the debt as the original borrower. If the principal borrower cannot be pursued for payment, for example they go bankrupt, the lender can pursue the other borrower/s for the entire debt.

The guarantor is a person who signs the loan contract and agrees to pay in lieu of the borrower (or co-borrowers) if the borrower/s fails to satisfy their payment obligations under the loan contract.

Essentially, the borrower/s has primary responsibility to pay the debt the guarantor has secondary responsibility for the debt. A guarantor may not be liable on the loan, except in the event of the borrower defaulting. Should a default on the loan occur, the guarantor bears full responsibility for paying off the entirety of the loan.

Bala Murugan: My father had signed guarantee for one of myneighbor's son education loan, but they are not paying the load amount and bank started sending notice to my father, pls advice how to handle this?

Harshala C: As per the terms and conditions of the loan guarantee agreement that your father must have signed, he would be responsible to make payments incase the primary borrower does not. Please find the reason for the default and pursuade the primary borrower to make payments for the loan obligiations.

Shayana N: will i be eligible for a home loan if I have guaranteed my brothers business loan last year?

Harshala C: The bank will look at your overall indebtedness, you income, fixed obligations and then decide to give you a loan. They will also check your CIBIL Report and Score.

Shayana N: also my brother has missed paying the EMIson this busines oan? will it affect me in anyway? i work for a government organization

Harshala C: If you were a co-borrower or guarantor of this business loan , then it may affect your eligibility to get a loan.

karthi: Hello, What are the risks Of-Being-Loan-Guarantors? What we need to see before Guarantee loan? if the person we supported NOT paid due or escaped then how to face the situation ? pls answer Thanks Karthi

Harshala C: You must find out the reasons why the primary borrower has missed making payments. You must pursuade the borrower the make payments if he has the financial ability. If he is in some financial duress, you may contact the bank to seek restructuring or settlement, if the bank is in agreement.