5 Important things you should know as a guarantor for sibling’s loan

5 Important things you should know as a guarantor for sibling's loan

We often turn to our loved ones in times of need. The sibling bond is a befitting example of this, you are constantly looking out for each other and sharing duties. There may come a time when one sibling needs financial assistance from the other. A common form this takes is when he or she asks the other to co-sign on a loan or become a co-borrower or guarantor.

Becoming a co-applicant will not only be for the sake of fulfilling a legal formality. It imposes legal and financial obligations too that both parties must fully understand. If your sibling asks you to be a guarantor, know that you will have to repay the entire loan in case of a conflict. Ask yourself these 4 questions before agreeing to take on borrowing liability.

What’s your liability?

If you are a financial guarantor, you will have to take on full legal liability for loan repayment, but in case of a non-financial guarantor, you only act as a liaison between the bank and your sibling to facilitate contact with him. In case of a home loan, the property can be recovered but in case of personal loans, the burden will entirely fall in you in case your sibling defaults or doesn’t have the funds to repay.

What’s sibling’s credit history?

Check his or her financial track record because the bank asks for a guarantor either when the loan amount is beyond a certain limit or if it doubts the repayment ability of the borrower due to poor credit score, weak financial standing or inconsistent income. So find out if he is financially sound, has a high credit score and can repay his own loan.

Can you exit midway?

Being a guarantor is a long-term commitment for loans with long tenures. You can’t back off unless you provide a replacement. So ensure the sibling takes a home loan EMI insurance, which stands guarantee for missed or outstanding EMIs. It is also a good idea for your brother or sister to provide secondary collateral so that your liability is reduced.

Will it affect your borrowing eligibility?

As a financial guarantor, your credit record and loan status will be affected in the same way as your sibling’s. If he/she defaults on EMIs, your credit record will reflect it, and if you want to take another loan in the future for your goals or financial plans, it can pose a problem. Besides, the loan amount will be decided on the basis of the one for which you stand guarantee.

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