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Why you should not to be a loan guarantor

Last updated on: January 27, 2014 16:05 IST

Chat@3: Risks of being a loan guarantor

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Harshala Chandorkar, senior vice president, CIBIL, answered readers' queries on the risks related to guaranteeing a loan in an online chat with readers, January 27

Unedited excerpts:

Harshala C: The guarantor’s /co-borrower’s credit report and credit score get affected in case of a default on the loan. Hence, it’s imperative that the guarantor / co-borrower on the loan should keep a track of the loan payments and ensure that the borrower pays the EMIs regularly on the due date, month on month.

Vinayak Tavade: Will being a guarantor impact my chances of obtaining another loan?

Harshala C: If there are any defaults on the loan that you have guaranteed then this may impact the chances of you getting loan approvals.

mustafa: hi mam, where i can find dos and donst about CIBIL?

Harshala C: You may visit the CIBIL website for more information on CIBIL.

Abinash Kumar: Is a co-borrower different from a co-applicant? for eg in home loan case.

Harshala C: No. Co-borrower and co-applicant mean the same .

Abdul Warith: I've been asked to be a guarantor by my aunt and uncle for a loan they are taking out for 5lck over 3 years in order to buy a car. They've asked me to do this because I have a "clean" credit history. I agreed, but now I'm starting to wonder if I've done the right thing? What does being a guarantor actually involved? They have bad credit history.

Harshala C: A guarantor on any form of loan is equally responsible to ensure the repayment of the loan. SO incase your uncle or aunt fail to make payments on the loan the bank will approach you for repayments. Secondly this loan will also appear in your CIBIL Report and if there are defaults the same will be reflected in your report as well

Harshala C: If payments are not done the bank may initiate legal proceedings.

Aatish Jagmanani: I currently have a loan with myslef. Can the same guarantor be guarantor for someone else in the same household as myself on a new loan?

Harshala C: Yes, it is possible that a guarantor can guarantee more than one loan.

Gurshan Gurmeet: I moved with my girlfriend years ago and she got a mortgage loan. I acted as guarantor. But now we have split up and she has another bf. If she can't pay. What happens if I don't pay either.? Please, advise.

Harshala C: The information on the loan that has been guaranteed appears in the Accounts section of the guarantor’s credit report. The ownership status of this loan account will be reflected as ‘Guarantor’. The credit report will also show the month-on-month payment behavior of the principal borrower towards this loan.

Any delinquencies and defaults will also get captured and reflected in the Guarantor’s credit report. In case of defaults and delinquencies by the principal borrower, the credit score of the guarantor will also get negatively impacted.

Dinkar Dosanjh: 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? What should i do in this situation?

Harshala C: A co-borrower is a direct borrower & has same responsibility for the debt as the original borrower. If the principal borrower cannot be pursued for payment, the bank can pursue the other borrower/s for the entire debt. The loan availed by your brother where you are a co-borrower will also appear on your CIBIL Report. If there are any defaults the same will reflect in you CIBIL Report as well.

Eknath Gangulee: Why do banks require guarantors? Mostly PSU banks need not Pvt sector banks. why?

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. This is an additional security which some banks insist on taking.

haresh: What should I consider before agreeing to be a guarantor?

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.

Harshala C • Do not sign the guarantee if you 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 and are aware of your liabilities in the event that variations are made to the terms and conditions of the loan

Vinay Shukla: What is 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, 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.

Gambhir Harbir: Will this effect in my credit history?

The information on the loan that has been guaranteed appears in the Accounts section of the guarantor’s credit report. The ownership status of this loan account will be reflected as ‘Guarantor’. The CIBIL report will also show the month-on-month payment behavior of the principal borrower towards this loan.

Any delinquencies and defaults will also get captured and reflected in the Guarantor’s credit report. In case of defaults and delinquencies by the principal borrower, the credit score of the guarantor will also get negatively impacted. Hence, it’s imperative that the guarantor on the loan should ensure that the borrower pays the EMIs regularly on the due date, month on month.

Jignesh Kaisth: what are the risk involved of being a loan guarantor? what precaution we should have to do? Please tell..!!

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 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 and are aware of your liabilities in the event that variations are made to the terms and conditions of the loan

Manasi Nath: 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

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. You may not be able to escape this situtaion.

Amit Shellar: 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? plz advice.

Harshala C: It is important to understand that as a co-borrower for the personal loan of your sister you are equally responsible to ensure the repayment of the loan. This loan will also appear on your CIBIL Report as well as your sister's report.


Photographs: Uttam Ghosh/Rediff.com