Loans: Think twice before becoming a guarantor

One fine morning when I was relaxing in the jogger's park after my routine jog, I met my old banker friend who happened to head the loan section of a leading private sector bank.

After exchanging pleasantries, an engaging talk began on the banking scenario which moved on to loans and its intricacies. This is when I popped the question: What if I become a guarantor for education loan for my nephew who is going for an MBA abroad?

But do you know what is a guarantor, he shot back.

This set my thought process and I started looking for answers. Here I would like to share with you the details on what it takes to be a guarantor.

To safeguard their interests, banks seek a guarantor who is legally bound to make repayments in case of default.

Also a guarantor is required in case the loan applicant does not live in the same city in which s/he is purchasing the property or if the nature of her/his job is such that s/he will be constantly transferred, could go abroad or have not applied for the loan from a permanent address.

If you're a salaried individual with a good employment record and laudable debt repayment history, banks are assured of your financial stability and credibility. In case you run a small business with low profits, the banks are taking a risk.

To safeguard their interests in such circumstances, banks seek a guarantor who is legally bound to make repayments in case of default by the borrower.

By seeking a guarantor, the lender tries to enforce a moral check that prevents the borrower from

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defaulting. There is one more aspect to it, though.

If an applicant feels that s/he is unable to secure a loan on her/his own, s/he needs a guarantor.

Also banks ask for a guarantor because of the credit-worthiness of an applicant but this certainly does not mean that suspicion is being raised on borrower's credit-worthiness.

So be cautious before signing up as a guarantor.

Before agreeing to serve as a guarantor, it is necessary to assess the borrower's credit, cash flows, to determine whether or not he or she is capable of handling the loan. Since a guarantor is liable to pay up in case the original borrower misses out on repayments to the lender, s/he needs to be extremely cautious.

Incase of default be ready to repay the loan. If you are not prepared for such an eventuality then do not agree to offer yourself as a guarantor for the borrower. Make certain that you have a copy of the loan contract and that you read and fully understand it before signing up.

Check the numbers because there is no way to back out of a guarantee.

So understand the pros and cons of being a loan guarantor especially in the current scenario when there is so much uncertainty around. I would like to refer here to a Supreme Court order reiterating that a guarantor cannot back out of the loan commitment once made.

So do not sign as a guarantor without knowing the pros and cons of it and land up in troubles for financing someone else's luxuries. As the guarantor is the security provider for repayment incase of a loan default, legal action can be taken against guarantor.

So think twice before becoming a guarantor.