Last weekend i was watching the movie “Aarakshan” & was moved by the scene wherein Amitabh Bachchan could not get the possession of his own house during Bad Times becoz during Good Times in order to help the Children of his close friend, he became Loan Guarantor of their Business Loan. Not only he risked his future but also of his family..I think, this topic cannot be explained more simpler then this. Just to add, things in real life cannot be sorted out as easily as shown in the movie.
Let us understand this topic in detail, For simplicity purpose i will list down complete details in points
1. In layman terms if u are becoming a Loan Guarantor then its as good as you are contractually undertaking the complete legal responsibility or liability to pay the balance loan amount in case of default i.e. in case person who took the loan defaults due to x y z reasons then Bank will knock your door for recovery of balance amount. In case you also refuse to pay then besides Borrower, you will be also declared as Defaulter and bank can exercise any option to recover the amount including attaching your property etc.
2. Banks always ask for Loan Guarantor only in dubious cases i.e. where the bank is also not sure that Borrower can payback the Loan amount…In a nutshell for all risky cases i.e. where probability of default is high, Banks ask for Loan Guarantor….Before signing documents as Loan Guarantor, be clear that risk of default is very high
3. Assume you became Loan Guarantor of Person A, who took loan of 40 Lacs and after few years u planned to buy your own house…You applied for a Loan of 60 Lacs according to ur self calculated eligibility…Now while sanctioning the Loan Amount, Bank will know that you are Loan Guarantor of Person A therefore while calculating your eligibility, Bank will reduce the Loan amount guaranteed by you and sanction the balance amount i.e. in this this case u have already guaranteed 40 Lacs of Person A and your Eligibility is 60 Lacs therefore bank will only sanction 20 Lacs instead of 60 Lacs applied by you becoz you already Guaranteed 40 Lacs which is your liability also…In case, you have guaranteed amount equal to your eligibility then your application for Loan will be rejected. Secondly the amount guaranteed by you as loan guarantor will reflect in your CIBIL score, which automatically will reduce your score and thus Loan eligibility.
4. Now you will say, i became Loan Guarantor without knowing its cons and i will write to bank that i wish to back out from Loan Guarantor Agreement…Its not that easy my friend, You cannot back out just like that. First borrower need to find out another Guarantor and than you can get out of this arrangement..In case Borrower refuse to do so than you are stuck.
5. Another Scenario, you are Loan Guarantor for Person A and you also have Home Loan against property…Now person A default on payment but you are paying your EMI’s on time…Suppose you completed your Home Loan Tenure and paid entire amount to bank…After closing Home Loan, most important part is to collect No Objection Certificate from Bank but since Person A is defaulting on his loan than Bank will not issue your No Objection Certificate till either person A or you don’t clear outstanding amount of Person A Loan becoz you are Loan Guarantor.
6. From above points its clear that there is no escape route infact. Now you must be wondering that i guaranteed the Loan in Bank A and i am applying or have loan with Bank B then how Bank B will come to know. Just to inform that all lenders are now consolidating the database & creating single database of all Borrowers so that people cannot borrow multiple times against same property so with just a click of mouse, banker will know complete history on borrowing, default and payment history. Secondly CIBIL report capture all details of credit history so no escape route
I am not discouraging you from being Loan Guarantor, May be tomorrow your parents, brother, sister or any other very close relative require your help & request you to become Loan Guarantor but before signing the dotted line, Think not once or twice but 1000 times becoz by being a Loan Guarantor, you are not only risking your future but also of your immediate family. In the battle of Heart and Mind, listen to both of them but take decision only from mind not from heart :)
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