Understanding the Role and Risks of Being a Loan Guarantor

A loan guarantor plays a crucial role in the lending process, particularly when the borrower’s credit profile or financial standing is insufficient. This comprehensive guide explores what it means to be a loan guarantor, the associated risks, and key considerations before agreeing to take on this responsibility.

A loan guarantor is an individual who agrees to repay a borrower’s debt if the borrower defaults. Lenders typically require a guarantor to mitigate risk when the borrower’s income or credit rating is inadequate, the loan amount is substantial, or the repayment term is long. By becoming a guarantor, you can enhance the borrower’s chances of loan approval, but you must be prepared for the potential financial implications if the borrower fails to meet their obligations.

1. Legal Agreement:

• As a guarantor, you must sign a legally binding agreement, known as a guarantee. This document outlines your obligation to repay the borrower’s loan if they default. Under Section 128 of the Indian Contract Act, you are liable to cover the debt, including any accrued interest and penalties.

2. Credit Impact:

• Your credit score can be affected if the borrower defaults on their payments. Unpaid EMIs can lower your credit rating, which may impact your ability to secure future loans. Often, lenders do not inform guarantors about the borrower’s payment issues, leaving you unaware of potential damage to your credit score.

1. Impact on Loan Eligibility:

• When you act as a guarantor, the borrower’s liabilities become your own. This can affect your eligibility for new loans, as lenders will consider your guarantee as part of your financial commitments, potentially reducing the amount you can borrow.
  

2. Legal Consequences:

• If the borrower defaults, including due to unforeseen circumstances like disability or death, you may face legal action from the lender to recover the debt. Failure to fulfill the repayment obligation can result in legal consequences and financial strain.
  

3. Difficulty Exiting the Agreement:

• It is challenging to withdraw as a guarantor once the agreement is in place. To remove your name from the guarantor role, the borrower must either find a new guarantor or offer collateral. This process involves significant approvals and can be complex.

1. Assess the Borrower's Financial Health:

• Thoroughly review the borrower’s financial status before agreeing to be a guarantor. Ensure their financial records are stable and they have a reliable repayment history.
  

2. Understand the Agreement:

• Carefully read the guarantee agreement and seek legal advice to understand all terms and conditions, especially those related to defaults or unforeseen borrower issues. Knowing your rights and obligations is crucial.
  

3. Monitor Repayment Activity:

• Regularly check on the borrower’s repayment status. Request updates on EMI payments and proactively follow up to ensure timely payments.
  

4. Consider a Co-Guarantor:

• If possible, suggest having a co-guarantor to share the responsibility. This arrangement can reduce your financial risk and provide additional security for the lender.

Being a loan guarantor is a significant commitment that involves financial and legal risks. Understanding these aspects and carefully evaluating the borrower’s situation will help you make an informed decision and manage your potential liabilities effectively.

As pre-approved customers of HDFC Bank, you can get instant Personal Loan disbursals within just 10 seconds with a maximum limit of up to  ₹40 Lakh!

Ready to apply? Click here to get started.

*Terms and conditions apply. The information provided in this article is generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances. Personal Loan at the sole discretion of HDFC Bank limited. Loan disbursal is subject to documentation and verification as per Banks requirement.