There will be many times in our life when you will be faced with a situation requiring you to become a Guarantor for a person who is applying or has applied for a loan or credit. In such situations, you will have very few options: one, accept to be a guarantor; two, arrange somebody else who can become a guarantor to this borrower; and three, clearly decline to be a guarantor. To be more precise, there are only two options, i.e. either you will be a guarantor or you will not be a guarantor. The ultimate choice will rest on your mindset, your financial conditions, your personal circumstances and your relationship with the person needing you to be his/ her guarantor.
Many a times we are confront with a situation whereby we cannot decline the other person. This may be due to your relationship with this person (borrower) or may be because of anything else. This person or borrower can be your relative, friend, colleague, business partner, neighbor, etc. If out of courtesy or out of your relationship with this person, you have made up your mind to help this person, then better you should think again in a wise and rational manner. Before you sign the guarantee papers, understand who the guarantor is and what are the risks associated with your wise act.
Who is a Guarantor?
A Guarantor is a person who accepts to make the payment of loan/ credit/ debt, if the borrower fails to make the payment or declines to do so. It is not only the amount of loan for which the guarantor will be liable, but his responsibility will include the charges, interest and penalties imposed on the borrower for non-payment or delay in payment. It is entirely on the discretion of the banker whether he wants to wait for the borrower to respond to the notices sent by him or to call the guarantor for clearing the loan and subsequent amounts on it.
A Guarantee can be an Unlimited Guarantee or it can be a Limited Guarantee. In case of latter, guarantor’s guarantee is limited to the amount decided or may be for a specific period of time, beyond which the guarantee ceases to exist. However, in case of unlimited guarantee, a guarantor remains liable not only for the current loan but also for all the subsequent borrowings and debt including the usage of credit card.
Risks of becoming a guarantor
Many a times, parents become a guarantor to their kids so as to help them out in getting an easy finance. But they realize their mistake only when it is too late for them. At that stage, they cannot even go back to the banker and blame him that they didn’t understand the risks while they were accepting the liability of being a guarantor. Saying this won’t help them now and they will have to deal with the trailing things. You can check things on your own. Visit a bank or a financial institution and propose them to be a guarantor to your friend who has approached you for the same for his loan that he is applying from this bank. You will be astonished to witness that the banker will hardly explain you the risks and the associated consequences in detail.
The liability of the guarantor remains valid until and until the amount for which the guarantee has been given is repaid in full by the borrower or till the time period for which the guarantee has been given lapses. Accepting to be a guarantor is not a small step. It is equivalent to stepping into somebody else’s shoes and accepting his liabilities. One should always seek an independent legal advice before deciding to be a guarantor.
You often believe the other person (borrower) that he/ she will never let you down and that you will never have to bear his debts. But understand one thing, that you are accepting this guarantee for future and not for the present. Future is uncertain and unpredictable. The longer will be the time the greater will be the risk and uncertainty. There can be many reasons of the default, viz. loss of income/ earning, illness, death, accident, family issues, unwillingness to pay and so on.
The Guarantee given on some other loan may also affect your ability to take a loan as the risk of other loan is added to your risk. This may lead to reduction in eligibility or may be complete denial of loans. Generally banks asks for such declaration in the form itself while applying for loan. Another one is that it become mandatory for you to keep a track of the person even if you don’t want to or if you are not in position. A Student after taking a education loan may work abroad and it may become little difficult for you to keep a track of him. The default or dispute in any loan may also lead to legal or disciplinary action where bank may block your other funds lying in other account of fixed deposits with immediate effect.
Whenever, you are asked to become a guarantor, weigh the pros and cons of accepting the responsibility and take your decision in the light of your appetite to bear the risk and available options. If you are sure and 100% confident on the intentions of the person for whom you agree to become guarantor then only take this step. Always remember, saying that you were not told the risks and consequences of being a guarantor won’t protect you from the loss.