Know your rights and liabilities of being a loan guarantor

By BankBazaar | March 30, 2011

It is always nice to help others in times of need. But helping as a loan guarantor, for any kind of loan be it personal loan, home loan etc., can complicate situation a bit, if you do not exercise caution on knowing about your liabilities before hand.

If the original loan borrower has defaulted, the banks will take all measures to arrive at your door step to recover the loan amount.

And it is not only the case of banks. Even employees credit co-operatives, can follow the same procedure. But however, the difference is that, in case of a default, the loan amount will be deducted from the employee who has signed as a guarantor salary when received.

In such situations, finances are in a tight spot for such guarantors, who have to leave the credit society on retirement, only because they were unable to pay the loan amount and were not able to encash their savings.

In such difficult situation, the only remedy that can be provided is to convince the borrower of the loan, so that the default can be borne by him. Approaching the credit counselors, might not be a solution since the centre can accept or reject the request of looking into the matter.

Here are precautions you need to take before you become a loan guarantor:

1. Analyze the repayment potential of the borrower.
2. The borrower should keep the guarantor informed as to what are the information being exchanged between him and the bank, even if the borrower has asked an enhancement in the credit limit.
3. Read the fine print of the loan document, to get a thorough understanding of what your liabilities are.
4. The guarantor should insert a clause absolving himself/herself of the surety if the original debtor agreement is altered later, without guarantor’s consent.

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