Jay and Vijay are around 35 years of age and are childhood friends, who went to the same school and later passed out from the same engineering college. Jay settled down for the standard software job and now, 13 years later is in the middle management position and draws a handsome salary. Vijay wanted to be an entrepreneur, started his own company which unfortunately is not doing that great and the performance is inconsistent. He does not have a fixed regular income. Hence, when he approached a bank for a home loan, the bank asked for a guarantor. Vijay approached Jay to help him out, and Jay signed up as a guarantor without much thought.
This was 3 years back. Recently, Jay came to know of an attractive property on the city outskirts and wanted to buy it as a weekend getaway and an investment. Since the amount was sizeable, he approached his bank for a home loan for part of the amount. Imagine his shock, when his application was rejected on grounds of a poor credit history! He was truly puzzled. He had a good salary, no outstanding loans and always paid his credit card bills on time. He decided to investigate this, and asked for a copy of his credit information report or CIR. It was then that he realized that his loan was rejected due to the unpaid/defaulted EMIs of his friend Vijay’s home loan which he had guaranteed!
Why did this happen?
Guaranteeing a loan is not just a mere formality to help someone. When one guarantees a loan, he also becomes responsible for the repayment of the loan. Not only does any default on the guaranteed loan go into the credit history of the guarantor, his loan eligibility also reduces so as to account for any amount he would have to pay in case of default on the guaranteed loan. So, he may not even get the desired amount of loan applied for, even if income wise, he is eligible for it.
Hence , it would be prudent to refrain from acting as a guarantor for people whom you do not know closely or trust fully, and even when you do so, make sure you exercise the due diligence and check the borrower’s financial records first.