The risks of becoming a guarantor for a bank loan

Many of us rely on loans for big purchases like a house or a car. Some of us may even need an urgent personal loan. It may also happen that a close friend or a relative asks you to be a guarantor to her loan. Will you agree to be the guarantor? Read on to know some basics of guaranteeing loans.

The need for a loan guarantor
You might think that the person who has been asked to get a guarantor for her loan is being told so because she has a poor track record of repaying loans.

Well, that could be one of the reasons but not the only one. The lender could also ask for a guarantor if some other loan requirements have not been met by the applicant, such as: income requirement for a particular loan amount, fixed obligation to income ratio or loan to value ratio.

It is not always, or even for all types of loans, that banks or other lending institutions ask for a guarantor. It depends on their own credit policies.

In other words, a guarantee will be asked for if the borrower is borrowing something that she is not really eligible for, or involves higher risks than acceptable to the credit institution.

Things to watch out for
When you sign the dotted line, accepting the responsibility to be a loan guarantor, you are fundamentally taking the financial responsibility for repayment of that loan, in case of default by the borrower.

So, while agreeing to be a guarantor, you will have to furnish details of income as well as assets and liabilities.

These will be used to determine your eligibility to be a guarantor.

If the borrower defaults on repayments, the bank would approach you for the payments. Failure to do so could make the lending institution attach your assets.

The other important thing to remember is that you share the responsibility to repay the loan, and hence this will reflect in your credit reports.

It may happen that in future you have a loan eligibility of Rs30 lakh and want a home loan of Rs25 lakh.

If you already are a guarantor for a Rs10 lakh loan, you won't be able to get Rs 25 lakh. If effect, your eligibility will be reduced by Rs10 lakh, the guaranteed amount. Your effective eligibility will come down to Rs20 lakh.

It is also important to note that once you agree to be a guarantor, it is not easy to withdraw from the responsibility.

It is possible only if the primary borrower and the lending institution agree to your application. The institution would agree only if an alternate guarantee for the outstanding amount is available.

So, before guaranteeing a loan be extremely sure about the repayment capabilities of the borrower. Factor in the fact that it will also reflect in your credit reports and could reduce your own loan eligibility in the future.

Make sure you read and understand all terms and conditions yourself. Check that the contract mentions the same amount that you have agreed to guarantee. Also look out for the notice period available for you, before the bank approaches you in case of a default.

There may a genuine case when you are required to be a guarantor for a dear one.

But as a rule-say no.

In arrangement with HT Syndication | MINT