“A friend in need is a friend indeed” - This quote has a lot of believers. However, it is sometimes hazardous too, especially where money is involved. When money enters a social relationship, it can change the very nature of our expectations and behavior. Money is a very powerful, but often, an invisible force in our lives. Such a force should be recognized and we should always be aware of when this force begins to play a negative role in our social relationships.
Have any of your close friends or relatives approached you to become their loan guarantor? Have you said ‘yes’ only because you know them or are you planning to analyze the situation objectively before making your decision?
Surely, most people would be inclined to help their friend or relative in need by readily becoming a guarantor without understanding the full inference. The most common error made is when a guarantor is mistaken to be a reference. But in reality, in the orbit of law, a guarantor is much more than just a friendly reference.
A simple definition of a loan guarantor can be explained as:
“A guarantor for bank loans means a person who commits to pay off the loan, or other liability in the event of default.”
Being a guarantor is always perilous because you cannot guarantee another person’s behavior, even if they are known to you. The decision to be a guarantor should be based on the knowledge of the debtor’s financial capacity to redeem the loan. Thus, it is important to understand the pros and cons of being a loan guarantor.
A loan guarantor is a third party who assures that the loan will be repaid in case the debtor defaults on his payment.
Guarantor loans usually involve legally binding contracts, but the loans may vary in amount and purpose.
Being a loan guarantor, one must completely read and agree to the terms and conditions put forth by the bank in their agreement.
It is natural that banking institutions demand for a guarantor, since lending is always a risky business with a huge risk of default by the debtor. So, a guarantor is like another way for the bank to regain the loan amount. But with a huge liability, why would anyone want to be a guarantor?
There can often be written multiple guarantors jointly and independently responsible for paying off the entire debt; a lender may act against one guarantor for all the debt rather than just a share. Some guarantees can be worded specifically to relieve hazard by limiting the loan repayment to a specific amount or share of the debt.
Guarantor is as liable as the debt defaulter.
A guarantor is someone who agrees to be obligated for the payment of someone else’s debt. It is important to understand that being a guarantor is not a bare formality to help a borrower obtain a loan, like a reference. The guarantor is equally responsible for final payment of the loan in case of default by the primary debtor.
Before being a guarantor, one must have the answers to questions such as,
- What is the amount of debt repayment you are committing to?
- Under what condition will the bank call on you to pay the liability?
- Does the bank have access to your assets in the bank if you fail to pay up as a guarantor?
- Is your liability limited to a specific amount or is it limited at all?
- When will your liability as a guarantor be laid off and how will you be prevised?
What you should know from the debtor
One must ask the borrower for his loan documentation.
Do not limit your enquiries to keep the good will. Clear whatever doubts you may have freely.
Assess the creditworthiness of the borrower.
Besides, one must also understand the Rights and Obligations of Co-Guarantors. You may be able to compel your fellow guarantors to contribute to the settlement of the loan even if the bank is unwilling to pursue them.
At the time of paying off the debt amount, if the defaulter fails to make the repayment, the loan guarantor has to lead as the debt defaulter. The guarantor then has to pay off the liabilities either using money, or assets. Thus, it invites a poor credit rating and a slim chance of getting a loan in the future. One needs to have his borrowing capacity calculated by the bank after including the debt owed, in case he wants to take his own loan.
There are certain requirements to be a guarantor. One must be over 23 years of age but no older than 70 years at the end of the loan term. They must have good credit history. Besides, they must have a debit or credit card. The minimum income criterion is also important but varies from one housing finance company to another. Few ask for a minimum gross annual income of Rs.1 lakh (Rs.100,000), while others may ask for the net annual income of a salaried applicant to be higher than Rs.1,50,000. If you are self-employed, the income could be lower, at a minimum gross annual income of Rs.85,000. However, there might be other conditions such as operating for a minimum number of years and generating profits.
However, having a guarantor of the loans does not mean questioning the credit worthiness of the debtor. It may not always be insecure. The sincere reasons for opting for a loan guarantor might be because the debtors have transferable jobs or because their job involves regular travels abroad. Also, the debtor may not have the required professional qualification in case of a self-employed borrower.
Opting for a loan guarantor is a matter of concern for the debtor too. Even though guarantor loans make life easier with limited credit histories to establish and build credit, they do have some disadvantages. For one, there is more on the line than just the debt defaulter’s credit history. By guaranteeing a loan, a guarantor commits to “make well” on the loan obligations in the event that the primary debtor defaults. This can make it difficult in finding someone willing to guarantee a loan for you.
Guarantor Loans are a much more concern for a Loan Guarantor, because it is a perilous job. In the event of a default, he will have to pay for a loan which he has not even taken. Being a guarantor is a serious commitment; one must consider guarantor methodology and regulations before deciding to guarantee someone’s loan. Give it adequate consideration and seek independent legal advice, if necessary, to clarify any doubts before you agree to be a guarantor.
As an ending note, it is better to exercise caution before deciding to take a loan guarantee. This is because once the loan is sanctioned, you cannot withdraw your guarantee for taking loan. Before signing the agreement, check specifics such as whether the contract tells you the amount that you are volunteering or liable to repay, the situations under which you will have to repay the loan, and if the amount that is borrowed can be increased without you being informed.