Friday, 3 February 2017

Your Obligations as a Loan Guarantor

Being a loan guarantor is a big responsibility. The moment you sign the documents you get a liability on your shoulder. Thus, if someone has requested you to become a loan guarantor for them, even if they are family, make sure take your time before impulsively saying "yes".
What does it mean to become a loan guarantor?
When you become a loan guarantor you give a pledge of legal binding for the repayment of the borrower's loan amount.  Generally, the same terms and conditions that are applicable to the borrower, are applicable to the guarantor as well. Thus, if for some reason the borrower fails to repay the loan, the entire responsibility will be left on your side. If need be, the lender can also sell off your assets for getting the loan amount back.
There are mainly two types of loan guarantors, who have different obligations:
1. Financial Loan Guarantor
As a financial loan guarantor you take the financial responsibility of the borrower. This means you are liable for repaying the loan should the borrower fails or decides not to repay, causing a CIBIL dispute.  Finance institutions generally ask for financial loan guarantors when the loan amount is high, and so is the risk. Examples include land mortgage loans and education loan for MBA.
In the process of becoming a financial loan guarantor you also usually have to provide your asset papers and proof of income.
2. Non-Financial Loan Guarantor
Non-financial loan guarantors are not liable for loan repayment, but merely serve as a contact person in regard to the borrower. Finance institutions generally ask for non-financial loan guarantors for short term loans, or small- loans. Unlike financial loan guarantor, in case of non-financial loan guarantor you just have to submit KYC(Know Your Customer) documents.
Risks of Becoming a Loan Guarantor:
There are many risks of becoming a loan guarantor, such as:
Lowered Creditworthiness
If the borrower defaults on their loan, then not only their CIBIL score is damaged, but yours too. This is because you are equally responsible for the loan repayment, and have to bear the same consequences as them.
It can take a long time to improve CIBIL score. Thus, every action that can affect it negatively should be taken seriously. 
Affect on Your Loan Applications
Most home loans and other big loans have a long tenure. So, if you have to get a loan for yourself when the borrower's loan is not repaid yet your lender may not approve your application. This is because you are already liable for another loan, that of the borrower's, and sanctioning a new loan could be risky on their end. You may have to wait until the borrower repays their loan in full before getting a loan for yourself.
Risk of Losing Property
Becoming a loan guarantor, especially a financial loan guarantor can have serious repercussions. If both the guarantor and borrow fail to repay the concerned loan in time, then as per ‘Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002′ the lender is authorized to seize the guarantor's property and sell it for recovering the loan amount.
It goes without saying that becoming a  loan guarantor for anyone is a truly risky business. Thus, it is best if could avoid it. Here are a few good reasons you can give to someone who has requested you to become a guarantor for them:
·        I might need to take a higher education loan myself in a couple of years. However, I won't be able to apply until I am free from the obligations of a guarantor.
·        My cibil score will be affected negatively, and it is already not in a good shape.
If it is difficult for you to refuse still, then you can also offer them the option of taking a home loan insurance policy. With this policy they have to pay a premium, and in return the bank who has offered the policy will bear the responsibly of a loan guarantor.

Unless the requesting person is really close to you, and you are confident they will be able to repay a loan, never say "yes" to becoming a loan guarantor. If you not able comment anything at the moment, request them to give you time. Make your choice carefully, as it is a big decision that can change your life.

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