Loan guarantor: To be or not to be

[diabloo]

Excellent article on being a "Guarantor for Loan" - Loan guarantor: To be or not to be

Who is a guarantor?
A guarantor is someone who agrees to be responsible for the payment of someone else's debt should the latter default on payments. It is important to understand that being a guarantor is not a mere formality to help a borrower obtain a loan. The guarantor is equally responsible for paying off the loan.

When is it okay to be a guarantor for a loan?
Being a guarantor is always risky because you cannot guarantee another person's behaviour. However, since it is very subjective, the decision to be a guarantor should be based on the knowledge of the borrower's financial capability to pay off the loan.

When is it not okay to be a guarantor?
If you come to understand that the bank is asking for a guarantor because of it is unsure about the borrower's repayment capability, it is important to take a close look and understand the borrower's financial capability yourself.

Is being asked for a guarantor an indicator of the credit-worthiness of an applicant?
While credit-worthiness is one of the major reasons a person is asked for a guarantor, it also does not necessarily mean that the borrower's credit-worthiness is being questioned. It could be based on other reasons such as:

• The applicant has a transferable job;
• The applicant job's involves frequent travel abroad;
• Loan is applied at a place other than the applicant's permanent address.

What can happen if the person whom I have agreed to be a guarantor for defaults?
When you sign on the dotted line and agree to become a guarantor, you are legally bound to pay off the debts if the primary borrower defaults. If the borrower does default, then:

• Banks will hound you to clear the debts.
• Personal assets such as bank accounts, cash as well as property could be attached (except for provident fund and agricultural land which cannot be attached under any court decree) and you could turn bankrupt.
• Your credit standing could get affected; which means that if you need any credit in future, your chances of getting the same could be dim.

Will being a guarantor impact my chances of obtaining another loan?
Yes, it will. 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.

Also, if the borrower has defaulted on some payments during the course of the loan, this also shows up on the guarantor's credit history. This can additionally reduce your chances of getting a loan.

How should I decide whether to be a guarantor or not?
An important question to ask your self when you are asked to be a guarantor is 'Am I ready to repay the loan?' If the answer is yes, go ahead, be a guarantor. If no, then you have to base your decision on a stronger reason than 'He is a close friend.'

On a final note, if you do become a guarantor, you have to understand that there is no turning back. You cannot revoke your guarantee after the loan has being sanctioned. So, before you do sign the dotted line, check whether the contract tells you the amount you are guaranteeing, the situations in which you will have to repay the loan and if the amount to be borrowed can be increased without you being told.

[Thad E Ginathom]

I won't do it.

I nearly lost a girlfriend once by refusing, and I've turned down close family.

One of the big problems with being a guarantor is that you may not be contacted until the borrower has been in default for so long that interest payment, fees, etc, may have built up to considerably more than the initial loan amount --- or, at least, this is the case back in my mother country.

[rohitgaur]

Standing as a Guarantor in a Loan has Legal Implications for the person as Repayment/Recovery Notice for the Loan (If defaulted) would be marked to the Guarantor as well. In India , There is a Credit History record sheet known as CIBIL (Credit Investigation Beaurau Of India Ltd.)Report. A person's credit history for his loans, related to the said PAN No., His current and previous addrsses are mapped to the Report.
All banks, even for Credit Card issuance use CIBIL Report as the Criteria for sanctioning. I E if your own record is good, but your guaranteed loan has gone for a Toss, you would be declined at least once for the credit applied.

A CIBIL report is a Person's Report card for His financial History and Histronics. You should always try to keep it clean and not Guarantee unless and Until you are sure of the Credibility and return of the Loan, I ve seen Hard recoveries happening with Guarantors so it is "Caveat Guarantor"

[siddartha]

unless its family , ud rather stay away .

[Rodie09]

My Questions:

Is there a clause whereby I can withdraw my Guarantor status sometime down the line - thereasons could be many, like I no longer have normal relations with the Person I have Guaranteed for, and alike.

Assuming there is such Clause, what will the Bank do once I have withdrawn my Guarantee. Will they sieze borrower's assets or do similar things??

If they dont do it and let the loan continue, I'd suggest one should withdraw Guarantee after sometime if you have anyways landed yourself in it in the first place.

just my two cents.

Any comments?

[Thad E Ginathom]

Is there a clause whereby I can withdraw my Guarantor status sometime down the line -

That would make no sense for the lender, so I doubt it.

[Ravveendrra]

For all my loans, I insist that there are no guarantors. It is too embarassing to ask people to stand guarantee for me. None of the lenders have refused me a loan so far, but they do ask for some additional security.

Similarly, I refuse to be a guarantor to anyone. I make a joke out of it and wriggle out.

References are a different matter altogether. I willingly give references for people I know and have no hesitation in asking for the same. A reference only indicates to the bank that the referor knows that the applicant exists (some also include statements to the effect that the person, their occupation and contact details are known). No harm at all.

Once you are a guarantor, it is only the lender who can discharge/release you from your obligations. They will do this only if the lender provides additional security or introduces a new guarantor in your place.

Cheers,

[Takumi-san]

I agree with everyone , standing by as guarantor makes no sense unless it close family (in which case guarantor or not, I would have to help to pull them out anyway). Anyone else and I refuse- even if it does seem rude. In my opinion its as good as asking me to pay the loan back for something that you bought - so thats not happening. I agree with Ravveendrra about references ; but I do make it a point to write what I actually think - no hyping up even if they want me to.

[prince_pervez]

There are many companies who ask their employees not to stand as guarantors for anyone. TATA Motors is one.

[mathew1105]

unless its family , ud rather stay away .

I agree, I had a similar experience recently, Someone that I know very well and has helped me in various situations in the past asked me to stand guarantor for someone else he knows, Not only did he want me to sign as a guarantor, he said the finance company also wanted my photograph, my Address proof, also my car's R.C book.
At first I said ok, Simply because I couldn't say no. But then I remembered what my wife always use to say, 'Know to say no'. I later called him and told him that If it's for him, I ok with anything, but not for someone else, even if he's well know to him.
After saying that, it was hard for me to face him a couple of times (he was cool though), later I got over it too.

[Gansan]

This is precisely the reason I am considering a car loan from HDFC Bank over the loan offered by Bank of India. The latter wants a guarantor, though the interest rates are lower. If I request my close family they will sign but I don't like to go for an obligation. Also I don't want to put them in a quandary where they may have to sign with a forced smile even if they feel otherwise.