Precautions to take before you become a loan guarantor

12-Sep-2018 written by : FSI-Team

Loan guarantor

A friend in need is a friend indeed! This is such an old saying. And true too. It's good to help people. But, when it comes to financial helping, specially when it is signing something officially, there are a few precautions that are better to be taken! Let's talk about a loan guarantor. There are a few cases where the loan is not directly approved because of the following option.

  • The credit score of the loan applicant is not as required
  • The loan applicant does not have that much income to be eligible for the total loan amount applied for
  • Seeing the credit history, the bank or the NBFC is unsure if he/she will be able to pay the loan
  • Debt-Burden ratio as of today is not as per the requirement of the banks

In all such cases, a guarantor is required for the loan to be sanctioned for any individual.

As mentioned, if there is someone in your family or friend circle who is facing issues like these, and you wish to become a guarantor, go ahead. Help them out. But make sure that would not affect you. But what all to take care for!

1.Who can be the Guarantor?

  • Legally there are few conditions that have to applicable if one is becoming a loan guarantor
  • He/She should be 18 years or above
  • The earning should be as much which loan approval requires
  • There should be no pressure in becoming the guarantor
  • He/She must not be state of Bankruptcy or loan defaulters list
  • He/She must understand the guarantee documents

2. Understanding the Responsibility

  • When you become the one, there are a few important responsibilities that should be understood.
  • You should know the legal rights of this is going to work
  • Read and understand the terms and conditions mentioned on the guarantee document minutely. If there is any misconception or anything that is not understood, clear it bank manager
  • You have the whole responsibility if in any case, the borrower makes any defaults. When the payment is not done, the first letter is issued to the borrower and if they do not respond to it, the second letter is issued to you
  • If the borrower does not pay back the loan amount, and you too refuse to say that's not your responsibility; that would be reflected in your CIBIL Report.
  • Be 100% sure that for the one whom you are singing the paper is responsible enough to understand the delicacy of this help

3. Do's and don'ts

  • Never sign any papers on peer pressure
  • Even if this is not your loan which you have taken, but this is going to be reflected in your report. So do what suits you the best
  • Read the documents twice, and ask again if any confusion
  • Know the capacity of the borrower

4. What if in between the loan tenure, the borrower wants to increase the loan amount? How would it work out?

When the borrower applies for the loan amount increase, there is a different contract that is made. So either you will have to again sign the new document and become the guarantor again or they would have to choose another party who is ready to become one.

5. If a borrower takes his/her hands off the contract and files the bankruptcy, how would it affect you?

If the borrower files the bankruptcy, that would affect you as well. With the laws and the documents signed, you are liable to pay what the borrower has unpaid. And hence, if you won't be paying it either you too would have to face that!

It's not bad to help someone, but what is expected is to be cautious enough. So, take that wise and calculated decision.



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