1. In layman terms if you are going to becomeg a Loan Guarantor then its as if you are contractually undertaking the complete legal responsibility or liability to pay the balance of the loan amount in case of default i.e. in case the person who took the loan defaults due to x y z reasons. In this case the bank will come knocking on your door for the recovery of the remaining balance due. If you refuse to repay the bank you will also be declared as Defaulter and the bank can exercise any option to recover the amount, including possession of your property etc.
2. Banks always ask for a Loan Guarantor only in dubious cases i.e. where the bank is also not sure that the Borrower can payback the Loan amount. In a nutshell, for all risky cases where the probability of default is high, Banks ask for a Loan Guarantor. Hence, before signing documents as Loan Guarantor, be clear that the risk of default is very high!
3. Assume you became a Loan Guarantor of Person A, who took a loan of $40,000 and after a few years you planned to buy your own house. You applied for a Loan of $60,000 according to your self calculated eligibility. Now while sanctioning the Loan Amount, the Bank will know that you are the Loan Guarantor of Person A. Therefore, while calculating your eligibility, the Bank will reduce the Loan amount guaranteed by you and sanction the balance amount i.e. in this case you have already guaranteed $40,000 of Person A and your Eligibility is $60,000 therefore the bank will only sanction $20,000 instead of the whole $60,000 you applied for. Because you already Guaranteed $40,000 which is your liability, you have guaranteed the amount equal to your eligibility and your application for the Loan will be rejected. Secondly, the amount guaranteed by you as the 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 the bank that I wish to back out from the Loan Guarantor Agreement. It is not that easy my friend! You cannot back out just like that! First, the borrower needs to find another Guarantor, and than you can get out of this arrangement. In case the Borrower refuses to do so than you are stuck.
5. In another scenario, you are a Loan Guarantor for Person A and you also have a Home Loan against property. Now person A defaults on the payment but you are paying your EMI’s on time. Suppose you completed your Home Loan Tenure and paid the entire amount to the bank. After closing the Home Loan the most important part is to collect a “No Objection Certificate” from Bank. However, since Person A is defaulting on his loan than the Bank will not issue your “No Objection Certificate” until either person A or you clear the outstanding amount of Person A’s Loan because you are the Loan Guarantor.
6. From the above points its clear that there is no escaping this bad situation. Now you must be wondering how Bank B would even be aware of your arrangement with Bank A? For this reason all lenders are now consolidating this data into one data store, creating single database of all Borrowers so that people cannot borrow multiple times against the same property. With just a click of mouse, bankers will now be able to see your complete history on borrowing, default, and payment history. Secondly, the CIBIL report captures all details of credit history.
I am not discouraging you from being a Loan Guarantor, maybe tomorrow your parents, brother, sister or any other very close relative might require your help and request you to become a Loan Guarantor. Just be aware that before signing the dotted line you think not once or twice but 1000 times because by being a Loan Guarantor, you are not only risking your future but also the future of your immediate family. In the battle of Heart and Mind, listen to both of them but make the decision mainly from the mind and not from heart! This way you will be doing what is right in the long run for everyone at stake. Call it tough love if you will!