Why you should think twice before guaranteeing a loan

By Harshala Chandorkar

You may have come across a situation when you have been requested to guarantee a home, auto or business loan by a relative or a friend. This is because while sanctioning high value loans, banks often insist on having a family member or friend as guarantor for the loan for security reasons. While it is okay to guarantee a loan of a trusted relative or friend, it is important to understand the implications of the responsibility you are taking on as a guarantor. Here is what you must know:

• Guarantor is responsible for payment in case of default by the principal borrower

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It is important to understand that by pledging as a guarantor on the loan, you are also legally responsible towards the timely 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 borrower is unable to do so.

• Guarantor is responsible for the repayment in case of untimely demise of the principal borrower

In case of death of the principal borrower, the guarantor on the loan may be approached by the bank for repayment of the loan, depending upon the clauses of the loan agreement.

• The guarantor’s credit report reflects the information on the loan

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 behaviour of the principal borrower towards this loan. Any delinquencies and defaults will also get captured and reflected in the Guarantor’s credit report.

• The guarantor’s credit score also gets impacted

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.

Having understood the broad implications of standing as a guarantor on a loan, here are some dos and don’ts you must keep in mind before guaranteeing a loan:

• 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

• Check your credit report and credit score before guarantying the loan in order to assess you credit standing prior to taking additional responsibility

• 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

The author is senior vice-president - consumer relations, CIBIL.