Nowadays banks have the facility to get all credit information of the applicants, thus it is not easy to hide anything from banks. All banks have access to access any type of credit data through CIBIL ratings and remarks. This will also help in understanding if there is any type of relationship with banks and how is your payment history on different types of loans and outstanding debts. As there is this level of access to information and transparency it is advisable to not be a guarantor to anyone unless you know the individual personally. In case if you are asked to be a guarantor it is very important to know all financial information related to that person.
What Types of Loans Need Guarantor?
Though there are no uniform guidelines per which banks demand for a guarantor, in case if the risk of loan amount and defaulting probability is high, banks will ask for a guarantor before sanctioning the loan. Each bank is given the right to decide whether they need a guarantor or not. If the loan amount is higher, bank will need one or more guarantor. In usual cases banks will ask for a guarantor for the loan only if the loan amount is greater than ₹ 500,000. Apart from this, the credit rating of the borrower and repayment capacity is taken into consideration. Few loans that require guarantor in most of the cases are house loans and education loans.
In Case If Borrower Defaults, Impact On Guarantor
Guarantor is not just the one who “attests the authenticity of the loan borrower” or “witness” but by being a guarantor, he promises the bank to repay the loan amount, in case if the borrower fails to repay the outstanding loan amount. Basically, in every sense, the guarantor is agreeing with the bank to repay the loan amount by being in the shoes of borrower. Guarantor will be held liable if banks are unable to trace the borrower for the defaulting payments.
Before issuing the notice to the guarantor, banks will wait for few months to check if the defaulting borrower will turn up to clear the outstanding debts. There will be direct impact of the financial status of the guarantor if borrower fails to repay the loan amount.
CIBIL Score Impact
Banks consider borrowers and guarantors equally, thus if there is default of payment on the loan amount, there will be direct impact on the credit score as well. There will be remarks on the guarantor CIBIL scoring, stating he is liable to repay loan of a defaulting borrower. Even when you stand as a guarantor for a loan, the information is shared with CIBIL and the scoring will be adjusted accordingly. This will be taken into consideration while you apply for new loans or any other type of financial assistance.
Thus always know about your liabilities; always try to get the most accurate details from banks and related agencies before being a guarantor. Go through the documents thoroughly before agreeing to be a guarantor for someone. Share only necessary information, irrespective of how trustworthy a person is, do not over share the information. The best example for this is, if you are being a guarantor for a loan amount of ₹ 3 million; do not show proof as your ₹ 10 million fixed deposit balance.
There are few things that you can do to control your risk as being a guarantor and the same are listed below:
- Firstly limit your liability to a small amount of loan
- Scrutinize the loan just as you would do if it was your requirement
- Try to keep this obligation for a limited period of time
- Gauge the chances of borrower faulting the payment and accordingly plan your money
Having said all these, it is the decision of a person to decide whether to be a guarantor or not. And banks have discretionary power to let you know whether they require a guarantor for a particular type of loan or not. Banks can frame their rules, terms and conditions at their sole decision. Also they can make the decision of whether or not a loan should be approved. If you are asked to be a guarantor for a borrower, firstly spare time to speak with the bank to know about the rules and regulations, about your liability as a borrowers and the risk involved in the loan and also complete financial details of the borrower including their credit score and CIBIL remarks.