Should you be a guarantor for a loan? Find out

Eight years ago, Suresh Alva, 33, and Mani Pillai, 30, willingly provided a helping hand to their colleague, Sujit Ambdekar, by signing his home loan documents as guarantors. Little did they realise that five years later, they would have to shoulder the burden of the loan. The three, who worked in a media house in Mumbai, moved to different organisations over the years. Unfortunately, in 2008, Ambdekar passed away. Six months later, Mani and Pillai received notices from the bank to repay the outstanding debt of Rs 4 lakh.

"We were stunned because we didn't realised while signing as guarantors that we might have to pay some day," says Pillai. To find a solution, they discussed the problem with Ambdekar's father and the bank representative. Finally, they paid off the loan and the bank released the house papers. Ambdekar's father then sold the house and used the money to repay Mani and Pillai.

What the duo had not realised was that guaranteeing a loan is vastly different from signing a document as a witness. When you agree to become a guarantor for a loan, you are making a financial commitment, one that should be done only after considering all the aspects.

This is important because if the borrower defaults on the payment, the responsibility of the loan has to be borne by the guarantor. In such a case, there is little a guarantor can do except talk to the lender and try to make a settlement for future payments of the remaining debt.

Satkam Diyva, chief executive officer of rupeetalk.com, a financial services portal, says that when a person signs on as a guarantor, he becomes as liable to repay the loan as the principal borrower. "According to the law, if the borrower defaults and is untraceable, the guarantor has to pay the outstanding debt. If need be, his assets can be sold to clear the debt," he adds.

Banks insist on guarantors for the loans in which there is no appropriate collateral, such as education and business loans. For other loans too, banks can insist on one, especially if the borrower does not have a good credit history.

Other instances where a guarantor is needed are if the borrower has a transferable job or one which involves frequent travel abroad. It's also necessary when the loan is applied for in a city other than the one that is the applicant's permanent address.

Some banks may not ask for a guarantor, but insist on a co-borrower, whose role and liability are the same as that of a borrower. So, he also has to pay the equated monthly instalments (EMIs) regularly.

According to Suvrat Saigal, consumer banking director, Barclays Corporate India , while a guarantor need not service a loan on a monthly basis, the loan repayment can have an impact on his credit history. "In case of a default, not only will he be asked by the financial institution to pay, but a default on his part while repaying the loan will also be reported to the credit bureaus," says Saigal.


Source: Economic Times


Thanks and Regards,
Sanchrai Sinha,
Intern at DENIP Consultants Pvt. Ltd.