Wednesday, 28 August, 2013

Do you know the implications of being a Guarantor of a Loan?

Be a guarantor at your own peril!

Your own Credit Score may be adversely impacted... Beware!


Take a quick look at the following excerpts from Economic Times, August 26, 2013:

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If the borrower defaults, the lender can ask the guarantor to repay the loan. 

When a friend or relative asks you to stand guarantee for his loan, don’t treat it as a simple formality. The Supreme Court has ruled that the responsibilities and liabilities of a guarantor are no different from that of the borrower. In this particular case in the apex court, Ganga Kishun had acted as guarantor for a loan taken by his friend, Ganga Prasad, who died before the loan was fully repaid. When the bank tried to recover the loan by selling Kishun’s land, he challenged the move in court. However, after a lengthy legal battle, which reached the Supreme Court, it was held that the bank had the right to recover the dues from the guarantor if the borrower had failed to pay.

Apart from repaying a loan that someone else has taken, the proceedings can negatively impact your loan eligibility. If the borrower defaults, the banks would turn to you for its dues. If you are unable to pay, your credit score will be impacted. Worse, banks consider the loans for which you are acting as guarantor to assess your repayment capacity before issuing you a fresh loan. Hence, ideally you should act as guarantor for loans with shorter tenures so that your responsibility ends sooner. If you are not confident about the debtor’s capacity to repay, avoid becoming a guarantor. 

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Even those of us who are reasonably financially aware and financially literate are not consciously aware about the above aspects, especially when a close friend or relative comes along with a form requesting you to be a "guarantor" for a loan that he/she is taking.

Obviously, each of us ought to think a zillion times before signing on the dotted line as a "guarantor" and ask basic questions like:

  1. Are we willing to make the commitment?
  2. Is the borrower likely to be able AND willing to repay on time?
  3. What will be the quid-pro-quo? (It need not be monetary!)
  4. If the roles are reversed, will the other party be willing to be a guarantor?
  5. What will be the consequence if we say "NO"?



Regards,

N


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