The thought of helping a friend seems to be a very noble gesture. But if the matter involved in the act includes something dealing with a loan it can get a little complicated.
For example, let us take a situation. If you have friend who requires a loan and asks you for being its guarantor, make sure that you know the pros and cons of the decision that you wish to take. First of all it is important to know, what is meant by a guarantor?
A guarantor is a person who is co-signee of the loan wherein it is legally binding on the guarantor to share the legal actions if incase the loan is not repaid or defaulted. Due to any circumstances if the main loan applicant defaults due to bankruptcy, illness, or even death, you as a guarantor will be directly held liable for the loan repayment. If the loan in question is a home loan then it can get a little clumsy since the tenor and the amount involved might be large depending upon the number of EMIs pad by the borrower. In such situations, if you didn’t have any idea about your legal obligations, you need to speak to the borrower or the borrower’s family (if the borrower is deceased) and formulate solutions as to how the loan can be repaid.
The passing off the liability onto the guarantor if the borrower doesn’t pay is imbibed within law; therefore it is the duty of the guarantor to repay the loan amount
The cases under which banks, generally ask for guarantors is under situations where the loan in question is an education loan, business loans etc where there might be difficulty in arranging appropriate collateral. Apart from this, if the borrower does not have a convincing credit history, If the job of the borrower seems to be transferrable, the borrower’s job involves to travel abroad frequently or if you as a borrower have applied for a loan in a city other than your permanent address, in such cases banks may ask for you to provide a guarantor.
What you need to know is that there is a difference between a co borrower and a guarantor. The former involves the co-borrower to contribute to the EMI payments where as the latter is not required. If you are a guarantor, it is important that you know that, if you are a guarantor you will be able to take a loan for your own use if required in future. But if the borrower has defaulted on the loan it will leave a bad mark on your credit report making it difficult for you to sign up for a loan individually. But if the guarantor is closely related to the borrower, for example, if the guarantor is the wife of a borrower, she will be quasi liable. It means that if your wife; wishes to take a loan in future, the borrowing capacity will be calculated after accounting for the original loan that is being repaid.
If in case you feel at any point of time that you need to quit as a guarantor, you can do so by writing in a notice to the lender and to the borrower. The bank will check the borrower’s financial condition and the original agreement. You will need to review the terms and conditions of relieving yourself from such an agreement. But it is important to note that it is up to the bank to decide if can be relieved or not. Only after going through all the terms and conditions make up your mind and decide whether it is safe for you to be a guarantor and also make sure that you know the borrower very well and is worth relying upon.