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Don’t sign guarantees for loans taken by friends and relatives.

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This is even more dangerous than what we discussed in the last post– Lending money to friends. On the face of it, you might think it’s ok to stand as a personal guarantor.

Who is a surety?

When you stand surety for someone, you are promising the lender that in case of a default from the borrower, you will take up the responsibility to pay off his debts. Sureties are also known by other names such as ‘co-applicants’ ‘co-signer’ ‘co-borrower’ ‘guarantor’ etc. Whatever be the name, the effect is the same.

Whether to sign a surety or not is not a simple decision to take. Because once you sign it –

  • You completely become responsible for your friend’s debt.
  • Your credit records are immediately updated with this information.

In case your friend defaults, you will also be liable for other expenses like legal expenses, recovery expenses, court fees etc..

Your name will be added to the list of liability holders for credit score purposes. Hence you credit score will be low and when you need a loan for your purpose, it might be difficult to get one since the bank will count the first loan as your liability.

Why do we end up signing surety for others?

  • The act of signing a surety is taken very casually by youngsters without thinking about the consequences. They think that it’s ‘just a signature’ help for a friend.
  • It could be your dearest friend who’d be asking for this help and it would be difficult for you to say no.
  • You might have previously made him guarantor for your loan. Hence, now it’s time to reciprocate.
  • May be your friends are taking advantage of your friendly character.

The only two questions that needs to be answered before signing a surety are –

  • Do you know the borrower very well? Can he /she be trusted? do you know their financial background – if the answer is yes and if they are from financially sound background, go to the second question or else stop here.
  • Can you pay off the loan In case the borrower defaults in his payments? If the answer is ‘yes’ go ahead. Or else stay away.

So we sum up our discussion here. The basic rules are-

  • If it’s your family members (your brother or sister) consider taking the risk.
  • If it’s for your friends and cousins – think twice.
  • If it’s for business partners – consult a financial expert like a chartered accountant. And ,
  • If it’s for your boyfriend or girlfriend or girlfriend’s best friend –  you are inviting trouble!!

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