Giving guarantee for a loan can impact your financial health, here's how

If you have a stable, well-paying job and considerable savings, it is possible that someday a friend or a relative, who is aware of your sound financial status, will request you to become a guarantor for a loan he is taking. By agreeing to become one, you may help that person avail of the loan easily. However, think twice before signing on the dotted line as this step has implications for your own financial health.
 
By agreeing to guarantee a loan, you agree to repay the loan outstanding should the principal borrower be unable to do so at any point during the loan term. While in most cases the guarantor’s payment obligation is not invoked since the borrower makes repayments on time, you could face a difficult situation if you are one of the unfortunate ones who have to bear the borrower’s obligation.
 
Virtually anyone can be roped in as a guarantor—parents, family members, relatives, friends or even colleagues. The lender ascertains the proposed guarantor’s financial health along with that of the borrower. “To qualify as a loan guarantor, one has to fulfil the same eligibility criteria—age, income, credit score, collateral, etc—as the loan applicant has to in order to qualify for the loan,” says Naveen Kukreja, chief executive officer (CEO) and co-founder, Paisabazaar.com.

Be careful and hard-nosed before you agree to such a request. Make sure that in case the liability falls on you, it will not spoil your financial health.  “Ideally, you should guarantee someone’s loan only if you are capable of repaying it without it impacting your finances. If you cannot take on that burden, refuse,” says Adhil Shetty, CEO, BankBazaar.com. He adds that your own borrowing capacity reduces by the extent of the loan amount you guarantee. So, if you need a loan yourself, giving a guarantee may cause problems.
 
Try to ascertain how many other loans the borrower has, his ability to repay them and whether he is financially disciplined. Opt out politely if the borrower is overleveraged or has a poor repayment history. “Guarantors are usually called upon if the borrower has a problematic credit history, unsteady income, or wants to borrow beyond his eligibility. At the very least, ascertain the reasons why the lender has sought a guarantor. The risks the lender faces apply to you as well. For example, if the borrower’s credit history is littered with late payments, defaults, or settlements, you will be taking on high risk by guaranteeing his loan. Examine the borrower’s credit report and assess his ability to repay the loan,” says Shetty.
 
A default has serious consequences for the guarantor. “The guarantor is equally liable for ensuring timely repayment. Any default or delay in a guaranteed loan hits the guarantor’s credit score,” says Kukreja. In addition, you could face action by the bank, including legal action, in case you are unable or unwilling to service the repayment obligations in the event of the inability or death of the borrower.
 
Once you have signed on as a guarantor, opting out of the responsibility is difficult, though not impossible. The process requires the involvement of both the lender and the borrower. “A guarantor can withdraw his guarantee only if the lending institution allows him to do so. The lender may require the primary borrower of the loan to furnish another guarantor or collateral before letting the present guarantor withdraw his guarantee,” informs Kukreja.