Things you should know before agreeing to be a guarantor for a loan

Sudeep is 40 and works in the software sector. His younger brother wants to take a personal loan and asks him to be the guarantor. As he is extremely close to his brother, Sudeep does not have the heart to refuse the request and agrees to it. Can this impact Sudeep’s finances?

As guarantor, Sudeep is as responsible as the borrower in ensuring a loan’s repayment. A guarantor pledges to repay the loan on behalf of the borrower who has taken the loan. The first thing that Sudeep needs to check is why the lender is asking for the guarantee. He has to be assured that his brother’s financials or credit scores are not weak, thus increasing the risk of default. If the reasons are non-financial in nature like the borrower’s job is transferable, he is on offshore assignments and the like, Sudeep has less to worry.

By standing guarantor for his brother’s loan, Sudeep is reducing his own loan eligibility to the extent of the amount of loan that he stands guarantee for. Moreover, information about the guarantor is also reported to credit bureaus such as Cibil. Thus, Sudeep’s credit score will be adversely impacted in case of a default. Also, the bank will initiate action soon after a default.

Therefore, Sudeep must be actually ready to repay the loan before giving his consent. He must bear in mind that he might end up taking another loan to repay his brother’s.

Sudeep must realise that he will not be able to walk out of the commitment during the duration of the loan at his will. As a guarantor, he will have no recourse once the default takes place.

So, it’s best to carefully evaluate the repayment capacity of the borrower before giving consent. Nevertheless, in case Sudeep does agree to stand guarantee, he must ensure that his liability is limited to the loan amount originally sanctioned.

Since it is very likely that Sudeep may have his own financial commitments and responsibilities and becoming a guarantor will be legally binding, he should seriously reconsider his decision.



The content is courtesy Centre for Investment Education and Learning (CIEL).