Often we take such decisions in relationships, friendships or emotions, the impact of which can be very heavy in the future. One such big decision is to become the guarantor of someone's loan. Many people think that becoming a guarantor is just a formality, you just have to sign and that's it. But the truth is completely different from this. One of your signs can get you into legal and financial troubles. According to Supreme Court Advocate on Record (AOR) Rajesh Kumar Chaurasia, it is very important to understand the risks before becoming a guarantor. Otherwise there is nothing left except regret later.
As easy as it may seem to take a loan from a bank or any financial institution, its process is equally full of responsibilities. The role of the guarantor is most important in this, but often people take it lightly. When you become a guarantor for someone's loan, it simply means that you are taking the entire responsibility of that loan on yourself. That means, if the person taking the loan is unable to repay the money due to some reason, the bank can recover it from you.
When there is a default in a loan and the installments are not paid on time, its first impact is on the credit score. And here's a big thing that people often don't understand - it affects not only the borrower but also the guarantor. As soon as the loan defaults, the bank sends its information to the credit bureau i.e. CIBIL. This report includes not only the PAN number of the borrower but also the guarantor. This means that if the person in front does not pay the EMI, then the effect of his mistake will be directly visible on your record.
Legally, banks are fully empowered to recover their money. When a loan account goes into default, the first step of the bank is to recover the money from the assets of the original borrower. If the bank amount is not met from there, then the guarantor comes next. At the time of signing the loan agreement, a written agreement is given that the guarantor will pay the outstanding amount and the interest charged on it in case the borrower fails to repay. In such a situation, the bank has the legal right to seize the property of the guarantor and complete its recovery process.
One should never take the decision of guaranteeing someone's loan due to emotions. The guarantor should be made only by that person, about whose financial condition and intentions you are fully aware. Before giving consent, it is important to ensure that what is the current financial condition of the person and whether he has ever defaulted in repaying any loan before. It is wise to take this step only after thorough investigation and assessing your own risk tolerance.
