Be Guarantor At Your Own Risk

While applying for loans, banks often ask for a guarantor. The need for a guarantor enhances, if the financial eligibility of a borrower is not meeting well with the standards set of bank. But, is it a good to become a guarantor? Let’s find out…

• What are the kinds of loans for which the bank insists on guarantor?

More than the loan type, it’s the riskiness of the loan that derives the choice of guarantor for banks. Usually, banks have their own set of pre-defined guidelines and lending standards to decide the creditworthiness of individual borrowers. Thus, if a borrower doesn’t meet the banks’ standards of creditworthiness, banks would classify him/ her as ‘risky’ and asks for guarantor. In following cases, banks generally ask for a guarantor:

1. The borrower has dubious re-payment record.
2. He has a transferable job or involves frequent overseas travel.
3. He is living in an area, where recovery can be difficult.
4. If the borrower doesn’t have a permanent address and is prone to change residents on a frequent basis.
5. If the value of the security offered is lower than the loan. In case of home loan, banks can ask for guarantor, if they fear the value of the mortgaged property will decrease in near future.
6. SME loans, above Rs 10 lakh, need a guarantor.

• What are the risks involved for a guarantor?

The liability of a guarantor and principal borrower are co-extensive and not in alternative. This means, the legal liability of a guarantor is exactly same as that of original person taking the loan. As per law, 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. In doing so, even his personal assets are liable to be sold off, if required to clear the debt.

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.

• What is the impact on the credit history on the guarantor? How does it impact the borrowing capacity of an individual?

A 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. 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.

• If the borrower is paying his loan EMIs on time, could the guarantor be relieved?

Relieving a guarantor is solely at the banks’ discretion. Most banks are not willing to relieve the guarantor, even if, the original borrower is paying EMIs regularly. 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, the application of a guarantor, wishing to be relieved, can be considered in the following cases:

1. The bank is convinced about your rational for not wishing to continue.
2. If the guarantor arrange for a substitute guarantor for the loan, with the consent of borrower.
3. If the guarantor gets the original borrower clear his loan.
4. If additional loan is granted without the consent of guarantor. The guarantor will not be liable for that portion of the loan.

However, before signing the documents, guarantor should review the guarantee deed and check conditions of revocation. As per the normal revocation process, a guarantor can revoke the guarantee by giving a notice in writing to the lender as well as the borrower. After which, lender would check the borrower’s financial condition as well as the aforesaid arrangements. It may or may not ask for another guarantor. After taking into account of all facts, the lender may or may not allow the guarantor to revoke guarantee.

Approval of the lender is mandatory in case of revocation of a guarantee

• Is it a matter of last resort that the bank approaches the guarantor to clear the borrowers' liabilities, when does it generally happen?

Banks approaches the guarantor only when they have exhausted all their resources to get the borrower to pay up. After that it’s the sole discretion of the lender as to which mode it decides to adopt for recovery of its dues. Banks usually have two options:

1) File a suit jointly against the borrower and guarantor;

2) Take the possession of the attached security, if any, under securitization act. Auction the property and recover their dues.

Banks, more often, adopt the first strategy to sue borrower and the guarantor for remaining debt. If guarantor also runs away then the property is auctioned. Alternately, banks may auction the property first and for any un-cleared debt approach the guarantor. It is completely at the discretion of banks.

However, auctioning a property is usually the last resort for banks, even though they take possession, as it’s a cumbersome process.