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Is Standing Guarantor for a Friends Loan A Good Idea?

IndianMoney.com Research Team | Updated On Tuesday, August 28,2018, 03:32 PM

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Is Standing Guarantor for a Friends Loan A Good Idea?

 

 

You have heard the famous saying “A friend in need is a friend indeed”. You love your friends. You are always there for your friends. If your friend asks for a favor, you are ready to grant it. One of your good friends, recently availed a home loan and needs you to stand guarantor, for the loan. You want to refuse but are afraid this could spoil relationships. You after all always say yes, to your friends. You are not sure what standing guarantor for a loan means. So should you stand guarantor for your friend’s home loan?

Before answering this question comes an even bigger question. When do banks need a guarantor for a loan? If the loan availed is a big amount, the loan has a long tenure, or the income earned just fits the bank eligibility criteria, the bank will ask for a guarantor for the loan. The bank wants to be safe from a default and asks for a guarantor for the loan. The amount borrowed under a home loan is huge (Most homes cost INR 50 Lakhs to a Crore). The tenure of a home loan is long (20 years to even 30 years). If the income of the borrower is on the lower side, then banks ask for a guarantor for the home loan.

Now to your question So what happens if you stand guarantor for your friend’s home loan? If your friend defaults on the home loan repayments, you will have to pay back his home loan. This is definitely not a nice position to be in. If you have to stand guarantor to your friend’s home loan, at least make sure he is trustworthy and has the income to repay the home loan. If you stand guarantor for the home loan of your friend, you will have to submit an address proof and an identity proof, details and proof of your income, bank statements and details of your assets and liabilities (any pending loans you have), to the bank.

SEE ALSO: Invest In Short Term Debt Funds

Why is standing guarantor for your friend’s home loan a bad idea?

Your friend has pledged collateral for the home loan. The collateral pledged, is the house against which he has availed the home loan. You have stood a guarantor for your friend’s home loan. If your friend defaults on the home loan repayments, the bank will catch you (guarantor), rather than seize the collateral (house) pledged by your friend. It is just too big a headache for the bank.

Does standing guarantor for a loan affect your credit score?

Banks assign you a credit score based on your outstanding loans (debt), as well as the loans you stand guarantor for. The loans you are repaying and your friend’s home loan where you are the guarantor, determine your credit score. If you stand guarantor for the home loan of your friend, your ability to avail a loan for yourself decreases. This happens until your friend repays the home loan. The loan of your friend is viewed as your loan and this would affect your credit score.

So remember this…. If you must stand guarantor for your friend’s home loan, make sure he will not run away leaving you to repay his home loan.

 

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IndianMoney.com Research Team

The research team at IndianMoney.com comprises of certified and experienced professionals who share the company's vision to make every Indian financially literate by equipping every Indian with right and unbiased advice. IndianMoney.com research team provides newsletters, articles, videos and FAQs on various financial products and concepts only to help you make wise financial decisions.

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