Guarantor To A Personal Loan? Know Your Responsibilities
Category: Personal Loan
Need a personal loan in India? As a borrower, it is much easier to obtain a personal loan if you have a guarantor. In fact, due to the risky nature of unsecured loans, some banks may not actually approve a loan unless the borrower finds a guarantor who is willing to be responsible for his or her loan. In case, where the loan is large or the lender is not confident of the borrower’s ability to pay back the loan, the lender may request for guarantor as security. Friends, relatives and colleagues often sign as guarantors for personal loans. Remember, a guarantor may be subjected to serious implications if the principal borrower defaults in timely repayment. You might be gauging on whether it’s good to become the guarantor when it counts on responsibilities or not? Let’s find out…
The liability of a loan guarantor and principal borrower are co-extensive. The legal position of a guarantor turns into borrower’s, in case, original borrower defaults. Here, the guarantor is legally bound to pay outstanding debt, if the original borrower is not traceable. Due to the risky nature of unsecured loans, the guarantor becomes the first alternative for the bank to recover the outstanding amount. The monthly earnings of the guarantor can be attached by the court to effect recovery of the borrower personal loan.
In case, the borrower is not detectable then the guarantor personal assets are liable to be sold off, if required to clear the debt. Thus one needs to carefully owe one’s own repayment capacity for the personal loan for which he is signing as guarantor. As a rule the guarantor’s monthly income should permit him to undertake repayment of the personal loan for which he is providing the guarantee. Once the original borrower has defaulted, there is very little a guarantor can do except talk to the lender and try to make a settlement for future payments of the remaining debt.
Impact on the Credit history
A personal loan guarantor involved in a defaulting case would certainly have a negative impact on his credit history because his legal position toward repayment of a loan remains exactly the same as that of original borrower. Even if the guarantor by himself has always been prompt in making credit repayments, his ratings will be adversely affected when a loan for which he has signed as a guarantor gets defaulted upon.
Reduced borrowing capacity
In case of default, his name along with the original borrower will be reported to CIBIL, which may hamper his chances of availing future loans for himself. In current scenario, the banks and other financial institutions are referring to the credit rating from CICs for determining the credit eligibility of applicants. Thus a person who has signed as guarantor to a personal loan will have reduced credit eligibility as the amount that he has guaranteed is also reflected as outstanding loan against his name by the CIC in calculating his eligibility.
The rational for banks is that the guarantor cannot shirk his responsibility in mid-way as he guaranteed for the full tenure of loan initially. However, before signing the documents, guarantor should review the guarantee deed.