Guarantor to your relative's loan? Beware!

With banks insisting on a guarantor for loans such as home loans and education loans, relatives might approach you to be a guarantor to their loans. However, before signing the document without a thought, do think of the repercussions.

With the number of cases of loan default on loan repayment increasing, it is all the more important to know who you are standing as a guarantor for.

Loan agents hound single women

You have to be choosy and be a guarantor to those whom you can trust. So, it’s necessary to realise the responsibility of a guarantor. By being a guarantor you are agreeing that if the actual borrower does not pay, you will pay.

In the eyes of the law, the guarantor is as good as the principal debtor.

Decoding runaway home loan tenures

Bankers say that the database maintained by the Credit Information Bureau of India Pvt Ltd (CIBIL), not just records information of the borrower, but also of the guarantors. So a person’s credit report based on which his loan eligibility is decided by banks will not just reflect the number of loans of credit cards you own, but also the loans to which you have stood a guarantor.

More India business stories | Get the latest Sensex update

CIBIL is a one stop shop for banks to check the credit history of an individual. It’s a body formed by 147 banks and other financial service providers to maintain a data bank of an individual’s transactions.

Banks provide CIBIL with the data on the customer as soon as they give out a loan. Banks can get a credit report of an individual from CIBIL, which indicates the amount that an individual has borrowed from other banks, the amount overdue (if any) and the period for which it was overdue.

The loan for which you have stood a guarantor will be treated as a loan taken by you. Hence if you in your personal capacity want a loan your ability to borrow would be reduced that extent. So don’t be surprised if in spite of a earning a decent salary, you don’t get a loan that you desperately need.

And if the person you had stood as a guarantor is a defaulter, then the guarantor has to pay up the overdue. If not, then the guarantor’s name is reported to the CIBIL database as a defaulter.

In case of a default, the bank issues a notice to borrower and later the second notice is sent both to the borrower and the guarantor. If the borrower still doesn’t pay, a legal notice to pay up is sent to both the borrower and the guarantor. Normally, the bank will try to recover maximum amount of overdue from the principal borrower. But, the guarantor too will be held liable to the overdue not cleared by the borrower.

To ensure that a single person doesn’t stand as a guarantor to many loans some banks take a policy that a person should not be a guarantor to more than two loans. Also if in spite of being a guarantor you did not clear the dues, you will be in the bad books of the bank. The bank will never give you any credit as you did not act as a responsible guarantor.

More India business stories | Get the latest Sensex update

There have been cases where in spite the guarantor paying up all overdues the no objection certificate for the vehicle or house for which the loan had been taken has been held back by bank. This is just because the person was a guarantor to a loan, where the actual borrower defaulted.

Under license from www.3dsyndication.com