Loan guarantors be forewarned!

By BankBazaar.com | March 14, 2014
Being a loan guarantor

Loan Guarantee

A key deciding factor will be to gauge the borrower’s financial capability to pay off the loan. You also need to evaluate objectively whether the borrower can honour such a commitment and not leave you to face the lone battle of paying up their dues in case of a default.

If you are confident on both these counts, then you can opt to become a guarantor but not before you completely read and agree to the terms and conditions put forth by the bank in their agreement.

What if you are approached by a close friend to become their loan guarantor? Would you say yes without question or would you analyse the situation objectively before making your decision. In money matters objectivity is critical, so we would advise you to opt for the latter. Read on to know more about being a loan guarantor and why you should think twice!

Is being a loan guarantor such a big deal?

When you are a loan guarantor for an individual’s loan it means that you agree to be responsible for the repayment of another individual’s debt in case of a default. It implies you are equally responsible for paying off the loan!

So, should I never be a loan guarantor?

When you provide guarantee for another individual’s debt, it definitely comes with its risks!

A key deciding factor will be to gauge the borrower’s financial capability to pay off the loan. You also need to evaluate objectively whether the borrower can honour such a commitment and not leave you to face the lone battle of paying up their dues in case of a default.

If you are confident on both these counts, then you can opt to become a guarantor but not before you completely read and agree to the terms and conditions put forth by the bank in their agreement.

Am I being approached because the applicant has a bad credit history?

While the lack of a good credit record ( past repayment track record of previous loans, credit card payments etc.) could be a possible reason for a bank to ask for a loan guarantor, this may not always be the case. It could be based on other reasons such as:

  • The borrower has a transferable job,
  • He has a job that involves frequent overseas travel
  • or the loan is applied at a place other than the applicant’s permanent address etc.

If I choose to become a loan guarantor and the borrower is unable to repay, then what happens?

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

  • The bank will approach you for clearing the debts
  • Personal assets such as bank accounts, cash as well as property could be claimed (except for provident fund and agricultural land which cannot be attached under any court decree) and you could turn bankrupt
  • Your credit standing will get affected and the chances of you getting a loan in the future would be slim.

Why should my chances of getting a loan in future be affected, when I did not take the loan?

It does not matter! 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.

If I agree to become a guarantor, what are the aspects I should look out for?

– The bank or lending institution is asking for a guarantor as a means to protect itself from a possible default and have the means to recover the money it is lending. Be aware that the bank can file a case against you and lay a claim to your assets for loan recovery.

– It all boils down to what the contract binding you to be the loan guarantor dictates. Hence, check whether the contract indicates the amount you are guaranteeing, make sure it does not exceed a specified limit that is agreed upon between you and the bank, else there might arise a situation where you will have to repay the entire loan in instances where the credit limit is increased on the initial loan borrowed.

– The terms and conditions should be clear and precise. Also, you need to make sure there are enough safety clauses in place that ensures you are protected to some extent against certain eventualities. For instance, the notice period that is available before the bank approaches you in case of a default should be clearly specified. Also, make sure you are not held liable if the original loan agreement is changed at a future point in time without you being aware of it.

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15 thoughts on “Loan guarantors be forewarned!

  1. Amit

    Hi,

    If I have only verified knowing a person and his address over phone and not specifically guaranteeing a loan, does that also gets qualified as guarantor? I mean i have not signed any document.

    I have a case where a friend took personal loan and is not paying off now and the collection agents are calling me and threating that they know my bank a/c and can recover from it? What right do I have in this case?

    Please suggest.
    Regards,
    Amit

    Reply
    1. leo martin

      hi amit,
      if you have agreed to be the gurantor for your friends personal loan then you are legally responsible
      for the loan when your freind fails to repay the personal loan.

      Reply
    2. Ravi

      You are not liable for anything till you sign the documents

      Reply
    3. shirish

      Dear Amit,

      I do not really know how old you are. No they can not force you or take out money from your account, if you have not signed any docs as a guarantor to your friend. Recovery team is just trying to frighten you to put pressure on your friend to cough up the dues. If they again call you and threaten, just tell them you are filing a police complaint for the harassment .

      Reply
    4. vikrant

      Since u have not submitted any document nor signed the bank cannot claim the amount from u. The Bank has not taken ur permission to give him the loan. They cannot directly recover money from ur Bank. Tell them to do what ever they want. Don't b afraid.

      Reply
    5. sks

      You may know somebody and can confirm the same over phone…that does not mean you qualified as guarantor.

      If Collection agent are calling record the conversation and the phone no. from which they are calling. With the same lodge a FIR immidietly. Also I will suggest you to lodge a complain in Consumer forum.

      Reply
    6. Sunny

      Amit, nothing to worry. You have no liability of any kind. What you had done was only identifying the person and his address. Legally nothing falls on you. You can complain to the banking ombudsman if the bank goons threaten you else lodge an FIR against them.
      Regards

      Reply
  2. Sivasankar P

    I have given my property as guarantee for my friend for taking a loan to build his house.
    He passed away due to a cardiac arrest. Does the liability fall on my property?

    Is there any way I can release my property will out any liability.

    Reply
    1. Ravi

      No you cannot release your property. The liability is now yours

      Reply
    2. anupam

      generally bank before the sanction of the housing loan get insurance cover for the property in the name of the borrower and insurance co. come in the picture for repayment of loan amount in-case of death of the individual.
      if this has happened then u r the luck one.

      Reply
    3. mohanraj

      ask for the loan documents and check whether you have signed papers relating to payment after the death of the defaulter.if not you can go to the court and seek remedy.

      Reply
    4. Hemang Rana

      No. A Guarantor is liable to square off the debt. There is no way out of it. Debt is an obligation to be discharged by the guarantor. It has to be paid, or else the equitably mortgaged property will be auctioned.

      Reply
  3. JKM

    Verbal Guarantee is no Guarantee. I f you have not signed any paper, you need not worry and can complain to to the police against harassment.

    Reply
  4. janardhanan

    We believe our friend; and on that basis we stand as a guarrantor- In most cases, one's financial position may not be knwon to others and based on the frirendship, a friend stands as a guarrantor. and the Loanee either could not pay or deliberately cheat – no way to escape.! There must be some escape for the gullible friend to escape other's liability.

    Reply

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