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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.
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