When R P Sharma agreed to become guarantor to his nephew’s personal loan, he didn’t know he was actually shooting himself in the foot, the pain of which would be felt for a long time. Unfortunately, his own children shared the brunt of his mistake. If only he understood his responsibilities as a guarantor before signing his nephew’s loan application, things would be different and far better.
It is often professed, “don’t mix up your money with your emotions”. Sometimes all we want to do is, as a goodwill gesture, extend a helping hand to help one out but often we get dragged into their pits. Mr. Sharma was under the impression that by becoming a guarantor he is only helping his brother’s son get the loan he yearned. After all why should he be worried when he is not the one who is actually borrowing from the bank? He assumed his responsibility was only limited to ensuring timely repayments were made. Alas, when bank officials came knocking his door he got the shock of his life. So would you say it was because his nephew defaulted on payments that led to Mr. Sharma’s misery? No. It was his ignorance that led to his downfall.
Why Do Banks Ask For A Guarantor?
When banks are approached for a loan application, they examine the applicant’s credit history. If they are not completely satisfied, they insist on some form of security. They may either ask for collateral (mostly in unsecured loans such as education loan, personal loan) or a co-borrower or a guarantor. They expect the guarantor to be a person with high creditworthiness.
A guarantor comes with a promise to repay the lender’s loan should the primary borrower fail to do so. He is someone who has “guaranteed” the lender that the loss will be made good incase of default. He assumes a secondary responsibility of the debt and it adds to his personal debt obligations.
What Should You Keep In Mind Before Guaranteeing?
Based on internal credit policies, institutions gauge overall indebtedness of a person. If you have stood as guarantor to any loan then it will be treated as an outstanding debt liability by the bank because there is a risk of it falling upon your shoulders any time.
Don’t be weighed down by a responsibility to oblige someone. By not standing a guarantor you might stand a risk of losing a friend or a relative. But before you put your own good credit on the line to be a guarantor, examine all “what-if” scenarios meticulously.
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