Q. Hello! I am a 40-year old marketing professional. A friend of mine recently asked me to be his home loan guarantor. I am not sure if I should help him as I am not aware of the technicalities involved. Will it affect my future loan prospects? Sushant Kalra
A. Extreme care should be exercised while standing as guarantor to a loan. You should certainly make yourself aware about various aspects as well as risks of being a loan guarantor and make an informed decision.
Why Your Friend Needs A Guarantor
Your friend needs a loan guarantor because he may be borrowing more than he’s eligible for. His eligibility may be low for various reasons such as a low income, a poor credit history, or existing debts. Therefore, the risks that the lender perceives apply to you as well. So your first step should be to check the reasons for which the lender has sought a guarantor on your friend’s loan.
Your Responsibilities & Risks
If your friend has a poor credit history, you will be taking a risk by becoming his loan guarantor. It would not be a bad idea to check your friend’s credit report and assess his ability to repay the loan. This is because if your friend defaults, the responsibility to pay his loan would fall upon you. If you fail to carry out this responsibility, your credit score would be damaged. Your creditworthiness would reduce and make it difficult for you to avail loans in the future.
It is also important to know here that the lenders check the creditworthiness of the loan guarantor too. So you cannot be a loan guarantor for your friend if you do not have a good credit history yourself. Your income, credit score and ability to repay your friend’s debt will also be assessed.
Should You Agree?
You should agree to become a financial guarantor if you’re (1) in a position to repay the friend’s loan if he defaults and (2) can tolerate a reduction in your own borrowing potential while you’re acting as a guarantor. It wouldn’t be easy to become a guarantor and then opt out of your responsibility. And if you do not have the risk appetite, you should say no.
Have a question on personal finance? Ping me on Twitter at @adhilshetty with the hashtag #AskAdhil. The writer is CEO, BankBazaar.com, an online marketplace for loans and credit cards.