10-Jan-2017 written by : FSI-Team
Dilip Doshi still shudders remembering the day when he agreed to sign as guarantor to an ex-colleagues personal loan application. Little did he know that in doing so he was risking his own credit health. When his colleague started missing payments, the bank approached Dilip to repay the debts as he had guaranteed the loan, something Dilip was not prepared for. Even after selling the principal borrower's assets to recover the loan, Dilip had to shell out over a lakh of rupees to settle the loan completely. An experience such as this can leave any one with a bitter taste in the mouth.
Clearly banks ask for a guarantor when they are not comfortable with the principal borrower's own ability in meeting the debt's obligations. Many banks ask for a guarantor and it is a misconception that only PSU banks ask for personal guarantors. It can be any credit institution such as a NBFC. They ask for third party guarantees depending on individual applications, type of debt, internal credit policy etc.
Usually they seek a personal guarantor when:
These are some cases where the bank might insist on a third person to stand as a guarantor. The guarantor must meet the norms as specified by the lender. Banks feel more comfortable when there is a person who "guarantees to the bank that incase the principal borrower fails to repay the loan then, you will make good the losses". This way the bank feels way more comfortable in lending as their interests are safeguarded. A personal guarantor is a form of "human" security.
Loan guarantors hold a secondary responsibility towards the loan, the primary being that of the principal borrower and the co-applicant. Only if there is a default, the liability transfers to the guarantor.
Banks prefer blood relatives and in-laws to become guarantors but they may at times even allow friends and colleagues too. Apart from KYC documents, your credentials will be checked - your income, outstanding liabilities, value of current possessions etc. will also be evaluated. You will be asked to sign an agreement on a stamp paper, making you legally bound to your promise.
Before you unwittingly sign the dotted line to stand as guarantor, take a look at the tumultuous responsibility that comes along with it. It is not just a verbal assurance to the lender that the borrower will fulfil the debt obligation. Infact you have promised to shoulder the responsibility of the loan if the primary borrower fails. Make note of following things before you nod:
Don't let your emotions get the better of you. If the bank has asked for a guarantor then possibly they doubt the borrower's capacity to repay. Don't let someone else spoil your credit health and you must choose to guarantee only for family members, say experts.