07-Mar-2016 written by : FSI-Team
“I am a guarantor to my brother’s loan. He has now defaulted on his last three EMIs. Due to this the bank has asked me to pay his dues. I have very humble means of living. How can I pay his debt of lakhs?” “..Can the bank attach my ancestral home to clear dues on a loan to which I am merely a guarantor and not an applicant?” “.. Why is my CIBIL affected? I have not defaulted on my payments. I have not applied for the loan. I only guaranteed a personal loan of my colleague. Where am I at fault?”
“..What are my options? Can I now detach myself from guaranteeing the loan? How soon will my score improve here onwards?” “My father helped his friend by becoming a guarantor to his son’s loan application. That was his biggest and only mistake for which the entire family paid.”
These are not just theoretical questions but situations that real people have faced.
We are not trying to stress that all guaranteed loans will go down south and end up putting you, the guarantor, in trouble. This article will help you understand what you are getting in to when you decide to guarantee a loan for a family or friend so that you can take an informed decision and be prepared for possible outcomes.
A lot of people do not understand the implications of being a guarantor and just sign a loan application in good faith. By becoming a guarantor you are legally “guaranteeing to the lender that the loanee will clear the dues and if not then you will bear it upon your shoulders to pay up the debt”. In the eyes of the law, you are as good as a co-applicant or the borrower without being the beneficiary of the money. Even if the primary loanee dies, the guarantor is liable to make good all dues towards the lender.
Mostly, banks ask for a guarantor in doubtful cases where they are unsure of the borrower’s repayment ability. Perhaps, this could be due to a huge loan amount, an unconvincing financial background or due to an existing poor CIBIL score owing to previous defaults in payment. Before becoming a guarantor be sure of the risk you will be exposed to. Unsecured loans like personal loans & education loans are the most popular category where a guarantor is mandated. This way banks feel a little safer with a guarantee backing it.
Well, as long as the money is paid back to the lending institution there is no problem and there will be no implications on your score of any kind, neither positive nor negative. However, in a few cases the lender has reported this loan to credit bureaus for the guarantor also. Which means that on running a credit check, the account would reflect in the credit report and shall impact the eligibility for guarantor. For example, you may have guaranteed a home loan of 20 lakhs for your brother. And when you apply for your own loan of 40 lakhs, the bank will only sanction 20 lakhs as you have already promised to pay 20 lakhs on your brother’s loan, if he defaults. So, your eligibility to seek loans will be reduced by the amount of loan that you have guaranteed.
If the borrower of the loan begins to default consistently on his dues, then you will come under the scanner too. The payments by principal borrower are captured in your report as well and incase of non-repayments, your CIBIL TransUnion score is negatively impacted. Just as a defaulted payment would adversely affect the score of the borrower, in the same way it will affect your score too.
When you need a loan for yourself, your guaranteed loan can cause a hindrance in it. Since all records are consolidated and maintained by CIBIL and before a sanction, banks do withdraw your CIBIL report. They will learn of your existing liabilities and discount your application by that amount.
As per the bank contract signed by you as a guarantor to a third party’s debt application, the bank can attach your personal assets and property to recover their amount. Any settlement of loan or delinquencies or defaults will be captured in your CIBIL score and report. It may take a long time and effort on your part to improve CIBIL score.
Be doubly sure. Or quadruply sure, if you have to be, before becoming a guarantor because there is no way of undoing it. Once you have signed the form you will have to live your liability. Sometimes the bank may let go a guarantor but only if the borrower can find a new guarantor to replace the original one, which hardly happens.
Ask for a copy of the borrower’s credit report and analyse it for his repayment capacity. Judge your own financial goals and foresee its impact if you need a loan in near future. Try to become a guarantor for loans that are of short term. Or you could guarantee loans like small personal loans, which may hurt your score, incase of default but they may be easy for you to clear off. But if you have to become liable as a guarantor for a long term loan, you may ask for an additional guarantor and/ or you could ask for a payment insurance policy, that could be used incase of death of the borrower.
Our best advice to all our customers and readers is to always read the offer documents carefully and understand the underlying terms and conditions. If need be seek legal advice and understand what you are getting into along with the risks. Observe prudence before you sign any form, give out your KYC details and most importantly, keep track of timely repayments just as it was your own loan.
Happy credit to you ☺