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as your best friend decided to take a bank loan and asked you to be a guarantor? Before you feel weighed down by obligation and agree to become one, consider the consequences. For, according to a ruling passed by the Supreme Court in May this year, if a debtor defaults, it is the guarantors responsibility to repay the entire loan. The apex court ruling was passed on a case filed by one Ganga Kishun of Uttar Pradesh, who had stood guarantor for a loan taken by his friend, Ganga Prasad, who died without clearing the loan. The Supreme Court held Kishun liable to pay Prasads dues as he had been the guarantor for the loan. So if you dont want to land in a problem, it is important to doublecheck the borrowers financial record and repayment ability. Here are the other things you should consider before you agree to turn a guarantor. The responsibility of repaying the debt doesnt automatically fall to the heirs. Its the guarantors obligation to pay if the debtor defaults or dies. Before you take the onerous responsibility of being a guarantor, you must check the credit score of the borrower and ensure that he is creditworthy, says Suresh Surana, founder, RSM Astute Consulting Group. You should also ensure that you have the financial wherewithal to shoulder the additional liability that will come in case the debtor defaults. The bank will not immediately begin to pester you the first time a borrower is unable to pay an EMI. It will first send him a notice. If the debtor continues to default on three payments, the bank will send him a registered notice. It will send a legal notice to the debtor and the guarantor only after the borrower does not pay the EMI for more than four months. Depending on the terms and conditions of the agreement, the bank may initiate legal proceedings against the debtor and guarantor simultaneously, or independently.
amount as the debtor, says Mohan. A bad credit score could make it difficult for you to borrow when you want to take a loan yourself. This is because the lender will determine your borrowing capacity only after taking into account the loan for which you are a guarantor. This doesnt mean that you will not be given a loan at all, but banks will definitely be cautious while assessing your repayment capacity, says Madan Mohan, credit counsellor, Disha Counselling Centre. This is why experts advise that if you do need to be a guarantor, agree for loans with shorter tenures instead of long-term ones such as home loans. Not only will your responsibility end sooner, but the loan value will also be usually lower in a short-term loan than in a long-term one. The only exception to this rule is if you need to guarantee a home loan. This is because if there is a default, the lender can always recover its dues by selling the asset. However, in cases where there is no asset as in the case of an education loan, the bank will force you as the guarantor to repay the loan in case of a default, and if you are unable to pay the EMI, it is entitled to recover the dues from your estate. This is why banks ask guarantors for a collateral too.
The value of the security is lower than that of the loan. In case of a home loan, the bank may ask for a guarantor if it fears that the value of the mortgaged property will fall in the future.