The risk of being a guarantor for your friends debt

As a guarantor, you promise the bank that you will pay your friend’s debt. Banks are generally asked for a guarantor when they are not convinced with the borrower’s asset.

In case, the borrower did not repay the loan amount then bank will first sell the asset that kept as a security with them to recover the money. After such set off, if any balance loan amount left out then it will be first recovered from the borrower and then from the guarantor’s asset.

If borrower has transferable job or has lack of repayment capacity then bank also ask for a guarantor.

Bankers in India use to update a central database called CIBIL where the credit The risk of being a guarantor for your friends debthistory of borrowers and guarantors are kept. If in case, borrower of the loan defaulted then credit history of guarantor will get affected for the defaulted amount of loan.

In such cases, you being a guarantor will not be eligible for a loan in future until this amount has been taken out from your head.

After becoming a guarantor your loan taking capability or eligibility for a loan amount will get reduced than what it would have been if you weren’t a guarantor.

When you apply for a loan, bank will look for your credit history and based on the amount that you have guaranteed, bank will reduce your eligibility to that extent.

The risk of being a guarantor for your friends debtIf in case borrower has defaulted or died without clearing the debt then bank will first try to get the defaulted amount from borrower’s asset. But, if that amount recovered is not sufficient then you as a guarantor will get notice for the defaulted amount and are also liable to make the payments. If bank wants then instead of selling borrowers property, they can ask or recover the defaulted amount from you.

Getting out from the role of guarantor is not that easy. You first have to convince the borrower for it and then borrower will get another guarantor to the satisfaction of bank.

After the second person accepted the liability, your liability as a guarantor will be frozen. In this case don’t forget to get a release letter from bank stating that you are no longer a guarantor on the loan.

Editorial Staff at Yourfinancebook is a team of finance professionals. The team has more than a decade experience in taxation and personal finance.