Tough exit route for a guarantor

Either the borrower has to arrange for another one or give additional security

Dilip Karangia still regrets the day he signed on the dotted line to become a 'guarantor' for the personal loan his friend had taken. He recalls this incident, which happened a decade ago when borrowing was expensive and banks used to extend deadlines to repay.

Unfortunately for Karangia, the borrower defaulted and, despite the bank liquidating the security, Dilip and another guarantor together had to pay nearly Rs 1 lakh to settle the loan.

Could Karangia have avoided getting into such a situation? You can't exit as a guarantor if the time for you to pay has actually come. However, you can consider this option when there are no signs of the borrower defaulting.

Unfortunately, you cannot approach the bank to cancel your guarantee; only the borrower can initiate this request.

REPERCUSSIONS IF THE BORROWER DEFAULTS

• If borrower defaults, the bank would first approach the borrower to take care of the dues. However, if the borrower is unable to do so, the lender will approach the guarantor to settle the dues
• The guarantor can ask the bank to sell the property to recover his dues
• If liquidating his assets is not sufficient, the bank has the right to recover funds from the guarantor
• If the guarantor repays the dues, all the borrower’s security will get transferred to the guarantor
• The guarantor can recover his money later from the borrower
• Hence, if you wish to keep your credit history intact and want a smooth disbursal of loan going ahead, make sure you become a guarantor only for immediate family members, advise financial planners

As a guarantor, you can think of moving out of that position if the borrower himself agrees to replace you. Or, if you wish to take a loan, too. And, when you think the borrower is in trouble and might not be able to repay his loan. However, experts point out that in the last case, exiting from the guarantor's shoes might be tough, as the bank might have already sensed the borrower's incapability to repay.

EXIT OPTIONS
First: If the borrower can convince the bank that he can arrange another guarantor, the bank will consider the proposition. The borrower can take this step if the guarantor requests this.

However, the bank will not agree to replace the guarantor so easily. The new guarantor will have to have a net worth equal to or more than the previous guarantor. Also, the net worth of the new guarantor should be greater than the loan dues.

If the borrower can convince the lender by getting a good guarantor, then the switch should be smooth. Ram Sangapure, general manager at Central Bank of India, says: "The time taken to switch guarantors depends on the person's case and is subjective. If the case is simple, it can take as little as two weeks to change or replace guarantors in a loan."

R K Bansal, executive director at IDBI Bank, says, "The credit history, net worth and statement of assets and liabilities of the new guarantor will be taken into consideration to ensure he can be a responsible one."

Second: As a guarantor, you can request the borrower to give additional security. If this increases the asset's value, then the bank will eventually release you as a guarantor. This will be applicable in cases where the borrower has been required to keep security, plus a guarantor for the loan. "For instance, if you take an education loan of more than Rs 7.5 lakh, banks usually require collateral plus third-party guarantee," says Bansal.

Usually, banks don't require any security for loans up to Rs 4 lakh. Loans between Rs 4 lakh and Rs 7.5 lakh will require a third-party guarantee. You could request the borrower to increase the value of security when you want to take a loan yourself. This is because being a guarantor increases your risk and reduces your eligibility to get a loan, as liability can be shifted to you in case the original borrower defaults," says Sangapure.

However, these exit options can't be exercised when the borrower has started showing signs of defaulting. Typically, a bank approaches the guarantor if the borrower defaults or continues making late payments for a few months in a row.