Gaurav Mashruwala, Certified Financial Planner shared his reading and outlook on bank loans and guarantors to those loans in an interview to CNBC-TV18.
Certified Financial Planner Gaurav Mashruwala says it makes no sense to become a "guarantor" on a 15-20 year home loan as it’s a long association and if things go sour, the guarantor will be in for a difficulty. Helping out a viewer query on CNBC-TV18, he said, the guarantor is responsible to make good on any loss in case of default by the borrower.
However, he also highlights a lesser-known fact that a guarantor can back out of his or her commitment if there is a change in terms and conditions of the loan. He has an option of saying "no" and then whatever the eventual action or eventual decision lender wants to take, he will take accordingly.
In case of top-up loans, the guarantor will be responsible only for what was originally guaranteed and he has the option of saying no.
Below is the edited script of his interview with CNBC-TV18's Latha Ventakesh and Reema Tendulkar
Q: What are the responsibilities of a guarantor to a loan because we have heard of cases in which someone who stood as guarantee to a loan has lost quite a bit because the person they were standing guarantee for perhaps died or various cases? So we want to know do they kick in only if the borrower is unable to repay, due to death or would they also kick in if the borrower chooses not to repay?
A: The guarantor has to make good if there is any loss. So, if the borrower does not pay and it is not necessarily only due to death, even he is not able to pay for whatever reason, the guarantor has to make good that loss To that extent guarantor is responsible. Guarantor is guaranteeing a lender that in the event of default by the borrower; I will pay the outstanding amount.
Q: Do banks require guarantors at all?
A: Most foreign banks don't ask for guarantors as far as loans concerning individuals are concerned. Foreign banks I haven't seen asking for guarantors for home loan or car loan or any other loans.
Almost all nationalized banks do ask for a guarantor also based on the borrowers circumstances. Couple of private sector banks also ask for guarantors if they want to ensure that borrowers credit rating are little weak and then to strengthen that up, they would ask for guarantors.
Nationalized banks, private sector banks, cooperative banks do ask for guarantor on case to case basis.
Q: What happens if the borrower opted for topping up the loan – if he increases the quantum of the loan midway? Would the guarantors be willy-nilly included or will their liability be restricted to what they originally guaranteed?
A: Basically the guarantor will be held responsible for what was originally guaranteed, so if there is a change midterm then guarantor is not liable. However, the lender would keep guarantor posted on all the midterm developments. For example for some reason if borrower says that I want to increase the tenure or I want to change in any other conditions and if at all they are accepted, the guarantor has to be kept in loop and then he has the option of continuing or not.
So it doesn't happen that automatically guarantor has to guarantee any change in terms and conditions. He has an option of saying no and then whatever the eventual action or eventual decision lender wants to take, the lender will take accordingly.
Q: What effect would all this have on the guarantors own credit rating if they themselves have perhaps servicing their own loans or their prospects of getting a future loan sanctioned if they are already standing guarantee?
A: This is definitely a contingent liability as far as guarantor is concerned. Hence the lender would look into if the he has stood guarantor anywhere else? If he is borrowing then what are the chances if the place where he has been a guarantor and if there are any eventualities there. So, yes it will certainly have an impact on guarantor’s credit worthiness as well as if there are defaults then his overall credit rating.
Caller Q: Around five years ago, I had agreed to become a guarantor for my friend who was taking a home loan of 20 years. At that point of time I was earning well and I did not have any financial responsibility. However, now I would be getting married next year and we plan to take a home together and therefore we are going to apply for a joint home loan. I don’t want my home loan eligibility to reduce because I am a guarantor for my friend. So can I stop being a guarantor for my friend's loan midway through his loan and what are my options?
A: No you can't midway stop because when stood as a guarantor you had said you will be there for 20 years.
Now two options are one is if your friend decides to complete the loan. I am not sure whether he has that kind of liquidity. Second option is request for a replacement. Now, here first the borrower should be agreeing and lender should be agreeing. In case lender is not willing to change then you don’t have much choice but to mandatorily stay as a guarantor as long as the loan is not repaid.
Because when you stood as a guarantor you can't put in a condition saying that you would be guarantor only for five years and after that you will not be a guarantor. When you signed those papers that option was not available and you didn’t even ask for it, now midway you cannot change.
Q: Would it be wiser not to stand guarantees?
A: That depends on the individual relationship. A lot of things get into it but usually I don't encourage people to stand as a guarantor unless it’s a very close relation like relatives or close family members, because 15-20 years more so in home loan case it’s a long association and if things go sour you are in for difficulty.
Like in case of the above example wherein the guarantor now five years down the line himself wants to borrow and he is stuck. If you are going to be standing as a guarantor for 20 years then take that call for 20 years. It's a little difficult, little long-term and hence be very cautious before signing on the doted line and saying, “Yes I will be the guarantor”.