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It is likely that the banks will reduce the limit of loans based on the guarantor position that one has built up
MANY individuals often undertake different financial actions without looking at the consequences.
This is true when it comes to the question of standing as a guarantor for the loans taken by someone else, as the consequences of this can be grave.
Guarantor: There are times when bank will ask for a guarantor for a loan that is granted to an individual. This is usually done when there are no assets available for keeping as a security against the loan, or also when these assets are less than what is required by the bank.
In such a situation, the bank will ask the borrower to bring in a guarantor who will be made responsible for the repayment of the loan in case the original borrower is not able to pay back this amount.
In case the original borrower fails to payback the loan, the bank will go to the guarantor to recover the amount, and hence, this can lead to a sticky situation on the financial front for the guarantor.
At this point of time, the guarantor cannot escape from the situation as they are bound to make the payment. Even in case, the loan does not actually come to a default state, there are ways in which a guarantor would be impacted.
Credit history: Credit history is available for all individual borrowers now, and this leads to the marking of individuals' credit score. The first thing that the individual has to realise is that when they are standing as a guarantor, the details will find its way to the credit records of the individual. So, the individual should not think that they would be able to avoid the payment by refusing to pay in case such a situation arises, as their financial position will be definitely impacted.
Reduction in limit: Every individual has some credit limit that the banks and other financial institutions are willing to extend to him depending upon the income. It is very likely that the banks will reduce the overall limit of loans that the individual can take based on the guarantor position that one has built up. Bank would not like to build up some excess risk into their lending because there is an element of overexposure, which can result in a default.
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