In India, we place great importance on relationships and trust. Whether it’s a friend, relative, or colleague, we often step forward to help without hesitation.
However, when it comes to becoming a loan guarantor, it’s not just about offering a little help—it’s a big responsibility with serious risks.
If someone close to you convinces you to become a guarantor with the assurance of “Just sign one document, nothing will happen,” you need to be cautious.
If the borrower defaults, the entire responsibility could fall on you. Before agreeing to be a guarantor, it’s essential to understand these 7 major risks.
1. You are Responsible for Repaying the Loan
If the primary borrower fails to repay the loan, the bank can directly ask you, the guarantor, to settle the debt.
Financial institutions can recover the loan amount from you without attempting to collect from the borrower first.
This could lead to a legal case against you, potentially affecting your salary, bank accounts, and even your property.
2. Your Credit Score Could Be Affected
If the borrower misses payments, it can negatively impact your credit score. This could make it difficult for you to secure loans in the future.
You might face higher interest rates or even loan rejection. Given the slowdown in personal loan growth, getting approval for loans may become even harder.
3. You Could Face Heavy Fines
If the borrower defaults, you may be required to pay not just the principal loan amount but also the interest, late fees, penalties, and processing charges.
If the loan is substantial, this could become a lifelong financial burden for you.
4. Legal Hassles and Court Cases
When the borrower defaults, the bank can send a notice directly to you, the guarantor. A legal case may also be filed against you, which could result in expensive lawyer fees and continuous court visits.
What was intended as a simple act of help could turn into a long-term legal headache.
5. Hard to Get Out After Becoming a Guarantor
Once you become a guarantor, it can be almost impossible to remove yourself from the agreement.
The borrower may need to provide another guarantor or offer sufficient collateral to release you from the responsibility. In many cases, banks do not allow the removal of a guarantor.
6. Strained Relationships
If the borrower fails to repay the loan, it could create tension and rifts in your relationship.
You may experience stress, depression, and mental strain due to the financial burden. Before agreeing to be a guarantor, consider the emotional toll it might take on you.
7. Risk of Property Confiscation
If the case goes to court and the verdict is against you, the bank can seize your assets, such as your bank account, car, home, or other valuable property. This could lead to severe financial distress.
Legal Sections That Apply to Loan Default Cases
In India, various laws come into play in loan default cases. These include the Indian Contract Act, 1872 (Sections 126, 128, 133, 139), and in some cases, Sections 318 (fraud) and 319 (cheating by fraudulent impersonation) of the Bharatiya Nyaya Sanhita (BNS), 2023.
Should You Become a Loan Guarantor?
Becoming a loan guarantor can be an emotional and helpful decision, but it’s crucial to understand the risks involved.
If the borrower is trustworthy, financially stable, and capable of making timely payments, becoming a guarantor might be a reasonable choice.
However, it’s important to read all legal documents carefully, consult a financial expert, and evaluate your own financial stability.
If you have any doubts or if your financial situation is not strong, it’s better to decline the offer to become a guarantor.
