Becoming a loan guarantor? Know all the rules!

By BankBazaar.com | November 13, 2009

While credit worthiness is one of the major reasons a person is asked for a guarantor, it also does not necessarily mean that the borrower’s credit worthiness is being questioned. However, when you sign on the dotted line and agree to become a guarantor, you are legally bound to pay off the debts if the primary borrower defaults.

Amit Saxena (name changed) is a software professional who was asked by his friend to be the guarantor for a loan of Rs. 2 L. Being a very ‘close friend’ Amit agreed immediately. Six months through the loan the friend disappeared without any trace and Amit was left with the substantial burden of paying off the loan.

This could be a situation where you could be caught up. Many of us at one point in time or other have been asked to be a guarantor for a friend’s or relative’s loan. Our answer to the request may have been based on any reason. However, in a culture like ours where we are prone to help our friends and relatives, it is important to understand the pros and cons of being a loan guarantor.

Who is a guarantor?

A guarantor is someone who agrees to be responsible for the payment of someone else’s debt should the latter default on payments. It is important to understand that being a guarantor is not a mere formality to help a borrower obtain a loan. The guarantor is equally responsible for paying off the loan.

When is it ok to be a guarantor for a loan?

Being a guarantor is always risky because you cannot guarantee another person’s behaviour. However, since it is very subjective, the decision to be a guarantor should be based on the knowledge of the borrower’s financial capability to pay off the loan.

When is it not ok to be a guarantor?

If you come to understand that the bank is asking for a guarantor because of it is unsure about the borrower’s repayment capability, it is important to take a close look and understand the borrower’s financial capability yourself.

Is being asked for a guarantor an indicator of the credit worthiness of an applicant?

While credit worthiness is one of the major reasons a person is asked for a guarantor, it also does not necessarily mean that the borrower’s credit worthiness is being questioned. It could be based on other reasons such as:

  • The applicant has a transferable job
  • The applicant job’s involves frequent travel abroad
  • Loan is applied at a place other than the applicant’s permanent address

What can happen if the person who I have agreed to be a guarantor for defaults?

When you sign on the dotted line and agree to become a guarantor, you are legally bound to pay off the debts if the primary borrower defaults. If the borrower does default, then:

  • Banks will hound you to clear the debts
  • Personal assets such as bank accounts, cash as well as property could be attached (except for provident fund and agricultural land which cannot be attached under any court decree) and you could turn bankrupt
  • Your credit standing could get affected; which means that if you need any credit in future, your chances of getting the same could be dim.

Will being a guarantor impact my chances of obtaining another loan?

Yes, it will. Most banks and financial institutions look at the loan that you are a guarantor for, as a loan that you hold. They will therefore deduct that much amount from your loan eligibility. Also, if the borrower has defaulted on some payments during the course of the loan, this also shows up on the guarantor’s credit history. This can additionally reduce your chances of getting a loan.

How should I decide whether to be a guarantor or not?

An important question to ask your self when you are asked to be a guarantor is ‘Am I ready to repay the loan?’ If the answer is yes, go ahead, be a guarantor. If no, then you have to base your decision on a stronger reason than ‘He is a close friend’.

On a final note, if you do become a guarantor, you have to understand that there is no turning back. You cannot revoke your guarantee after the loan has being sanctioned. So, before you do sign the dotted line, check whether the contract tells you the amount you are guaranteeing, the situations in which you will have to repay the loan and if the amount to be borrowed can be increased without you being told.

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22 thoughts on “Becoming a loan guarantor? Know all the rules!

  1. AvatarTimir Tejtimir

    I am telling you this from my own experience. well, as the article says at the end: "On a final note, if you do become a guarantor, you have to understand that there is no turning back."
    So, my advice to you all is: if you do have that much money, simply donate but never ever loan or sign any guarantee papers for your friends.
    If you give and forget, you are happy forever. that way your friends will also be obliged to you forever. if by any chance, your money is returned; in that case too he can not ever forget that you helped when he needed you.
    but if you loan or become instrumental to getting a loan by being a guarantor, then you had it. either he is not able to pay in time or pay at all. in that case, you are in soup. bankers will squeeze the juice out of you. if you ask your friend, he either will get unhappy and at times irritated. he will think that you don't even realise his financial problems. if he had them, he would have paid it. in the end, you pay to the bankers.
    so why not pay in the first place.
    to end this, let me tell you, "if you do become a guarantor, you have to understand that there is no turning back."

    Reply
  2. Avatarparameswarantn

    WISE PEOPLE HAVE TOLD MANY A TIMES THAT man behaves in the most unpredictable way .It is better to have ABSOLUTE FAITH in this statement if we are interested in our safety.Real friendship never depends on money transactions.

    Reply
  3. AvatarTOmmy

    Yes i agree with this article ..We would be literally gone if he /she doesnt pay back the loan .. so be careful…end of the day no matter what financial matters pinche's us a lot than anything else

    Reply
  4. AvatarSatish Rane

    How much amount repay guaranter from his payment & how many installation to pay compulsary, How withdraw his guarantee,How many years he can stand for guarantee.

    Reply
  5. AvatarIshan

    hi plz help me

    My father has given a guarantee of his friend when he was taking a loan. Now my father is no more n his friend has
    not giving the EMI thats why bank is approaching me to pay off the rest of the amount . So what should i do is there any legal way to force him to pay as my father is not alive.

    Reply
  6. AvatarSarasam

    HI,
    I become a guarantor for my brother home loan. If my brother not abble to repay the loan, than i have to payback behalf my brother.

    If i paid the loan, then the house become my property or still own by my brother?

    Pls Explain

    Reply
  7. AvatarHemant kumar

    Hi
    One of unemployed My friend wanted to do business and for his help me and one of my friend pledged our FDs to bank as a guarantee to loan our unemployed friend .
    After some time he was not able to give emi and come to us that please repay bank money I can’t give interest now. Till this time he was giving emi regularly.
    My 2nd friend suggested me to withdraw our FD otherwise we have to pay interest also. My 2nd friend had good relationship in that bank. So my friend ask me to come bank for signature. Unfortunately or fortunately I wasn’t able to make Me presence in bank for few days.
    My 2nd friend withdrawal my FD and settled 80% amount through my FD and 20% through his FD. My 2nd friend also cheated on me and saved his money safe.
    Now someone please help me to answer my questions.
    1) how bank can withdraw my FD without my signature or presence.
    2) if it is settled by bank on default of no recovering of EMI ,can it be? because one who deposited interest in bank seven days back can be defaulter after seven days without any notice??
    3) what action can I take if bank is there with my 2nd friend.

    Friends help me out, I Wil be very thankful to you

    Reply
    1. AvatarTeam BankBazaar

      Hi Hemant,

      When you sign on the dotted line and agree to become a guarantor, you are legally bound to pay off the debts if the primary borrower defaults. Banks are not allowed to withdraw your FD without your authorisation. As for your friend withdrawing the FD on your behalf, we suggest you speak with your legal counsel for help.

      Thanks,
      Team BankBazaar

      Reply
  8. AvatarGowtham.P

    Plz Advice Me..

    My Father Expired 10 months before, He signed for his co worker as a guarantor for a personal loan in Syndicate bank,

    Now He is not repaying loan properly, Even though he is government servant bank doesn’t doing recovery from him, Bank official pressuring us for repayment.

    Still Now we dind not get ant death benefits from Goverment . Already we in a bad situation

    kindly any bank experts suggest me

    Reply
    1. AvatarTeam BankBazaar

      Hi Gowtham.P,

      The bank cannot hold you/your family responsible for the non-repayment of a loan taken by someone else, even though your deceased father was a guarantor. In this case, you should seek legal counsel to safeguard your assets.

      Good Luck.

      Cheers,
      Team BankBazaar

      Reply
  9. AvatarTarun

    If I become a guarantor for a personal loan of my friend. How does it affects me when I want to take any kind of loan from a bank. ???

    Reply
    1. AvatarTeam BankBazaar

      Hi Tarun,

      Becoming a guarantor is a responsibility. In case of non-repayment by your friend, the bank can hold you responsible. Also, this will affect your credit rating.

      Cheers,
      Team BankBazaar

      Reply
  10. Avatarrobin

    my friend take a car loan I am his guarantor but he is not pay any emi please suggest me how I can short this problem

    Reply
    1. AvatarTeam BankBazaar

      Hi Robin,

      As a guarantor, you will be responsible for the repayment of the loan in case your friend defaults. Please read the terms and conditions of the loan and speak to your friend. If needed, you could ask your legal counsel to advise you.

      Good luck.

      Cheers,
      Team BankBazaar

      Reply
  11. AvatarAlok Singh

    I have taken a guarantee for a car loan. Can I withdraw my guarantee . how long this guarantee will go on.

    Reply
    1. AvatarTeam BankBazaar

      Hi Alok Singh,

      You cannot withdraw from being a guarantor once the loan is processed. You will be the guarantor as long as the loan is open or in active status. In short, you will be the guarantor until the loan is paid off unless you are able to find another guarantor for the loan.

      Cheers,
      Team BankBazaar

      Reply
    1. AvatarTeam BankBazaar

      Hi amankapri,

      This will vary from the terms and conditions set by the different banks. Please check with the bank you intend to avail the loan from for the exact age. Generally, loans are given to individuals who are between the ages of 21 – 60 years.

      All the best!

      Cheers,
      Team BankBazaar

      Reply
  12. AvatarAMISHI

    Hi there,

    Here is to hoping you will be able to help me with a response to my questions:

    First: If am an NRI & need a home loan can my guarantor be a NON financial guarantor?

    Secondly: If am able to have a NON-financial guarantor does the loan amount I borrowed show up on the NON financial guarantor CIBIL records?

    Your prompt reply is appreciated

    Thanks
    Amishi

    Reply
    1. AvatarTeam BankBazaar

      Hi Amishi, Anybody can be your guarantor. And the loan amount will appear in your guarantor’s CIBIL records. Also, his/her Credit Score will be affected if there is a default from your end. Cheers, Team BankBazaar

      Reply
  13. AvatarIndranil Maji

    Can someone be a gurantor for 2 education loans ,?

    Reply
    1. AvatarTeam BankBazaar

      Hi Indranil,

      Yes, it is possible.

      Cheers,
      Team BankBazaar

      Reply

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