Are you a loan guarantor for someone?:If they default, the burden falls on you — here are 6 precautions you must take

If a friend or relative needs a loan and asks you to become a guarantor, what would you do? Most people say yes, assuming it’s just a matter of signing a few documents. If you think the same, pause for a moment. Being a loan guarantor is not a mere formality. It carries serious financial and legal responsibilities. If the borrower fails to pay the EMI (Equated Monthly Installment) on time, your credit score can be affected. In fact, the bank or financial institution has the right to recover the outstanding amount directly from you. This can make it difficult for you to obtain loans in the future. That’s why it’s crucial to fully understand the risks before agreeing to become a loan guarantor. In today’s Your Money column, we explain: · What is a loan guarantor? · What precautions should you take before becoming a guarantor? · What are the responsibilities of a loan guarantor? · How can your name be removed from the guarantor list? Expert: Rajshekhar, Financial Expert, Dehradun Q: What does it mean to be a loan guarantor? Ans: A loan guarantor is a person who legally guarantees a loan. This means that if the borrower is unable to repay the loan for any reason, the guarantor becomes responsible for repaying the entire outstanding amount. Q: Who can become a loan guarantor? Ans: Any individual can become a loan guarantor, provided they meet the eligibility criteria set by the bank. A guarantor must satisfy the same creditworthiness requirements as the borrower, meaning their credit profile should be acceptable to the lender. In most cases, close family members agree to take on the role of a guarantor. Q: Why does the bank collect income-related documents and conduct KYC for loan guarantors? Ans: Banks collect income-related documents and complete KYC to assess the guarantor’s repayment capacity—that is, their financial ability to repay the loan if required. A guarantor is treated almost like a borrower who does not pay regular EMIs. However, if the borrower defaults on repayments, the guarantor becomes responsible for repaying the loan. For this reason, guarantors are required to submit KYC and income documents so the bank can determine whether they are financially capable of repaying the loan in case of default. Q: What responsibilities come with becoming a loan guarantor? Ans: Becoming a guarantor involves much more than just lending your name or signature. It is a serious legal and financial obligation, as you are responsible for repaying the debt if the borrower fails to do so. Let’s understand these responsibilities in detail through graphics. Q: If the borrower whose loan you have guaranteed fails to repay on time, what action can the bank take against you? Ans: If the borrower defaults on loan repayments, the guarantor’s credit score can be negatively impacted. The bank has the right to recover the outstanding amount directly from the guarantor. It may issue legal notices, deduct money from the guarantor’s bank account, and, if necessary, initiate legal proceedings. See the graphic below to understand all the possible losses a guarantor may face. Q: What financial factors does the bank examine before approving someone as a guarantor? Ans: Before approving a guarantor, the bank evaluates the individual’s overall financial position. This includes their income, stability of employment or business, existing loan obligations, credit score, and repayment history. The objective is to ensure that, in case the borrower defaults, the guarantor has the financial capacity to repay the loan. Q: What should you keep in mind before becoming a guarantor for someone’s loan? Ans: Before agreeing to become a guarantor, carefully assess the borrower’s credibility and their ability to repay the loan. You should take on this responsibility only for someone you fully trust. Additionally, agree to guarantee only an amount that you could repay on your own if required. It is also essential to clearly understand all loan terms, conditions, and the responsibilities that come with being a guarantor. Let’s understand this better through graphics. Q: If you are a guarantor and the loan defaults, how can you protect yourself? Ans: If the borrower fails to pay the loan installment, first communicate with them and encourage immediate repayment. If the issue persists, contact the bank without delay and clearly explain the situation. You may request solutions such as a one-time settlement—where the loan is closed by paying a mutually agreed amount—or loan restructuring, which may involve changes to the loan tenure, EMI amount, or repayment terms. To avoid such risks in the future, always understand all loan terms in detail before becoming a guarantor and consider seeking legal advice if required. Q: How can your name be removed from the guarantor list? Ans: Once you have signed as a guarantor, removing your name is not easy. The borrower must either transfer the loan or arrange for a new guarantor, both of which require the bank’s approval. You can submit a written request to the bank, but the final decision lies entirely with the lender. In many cases, a guarantor’s name can be removed only after the loan is fully repaid. Q: How does a guarantor get information about the borrower’s bank statements or EMI payments? Ans: Generally, banks do not share the borrower’s bank statements or EMI payment details directly with the guarantor, as this information is treated as confidential customer data. However, if the borrower voluntarily shares these details, or if the guarantor is also a co-signer—someone who signs the loan agreement and shares repayment responsibility—then the guarantor may receive loan-related information. If an EMI is missed, the bank usually sends a default notice to the guarantor. Therefore, it is advisable for guarantors to stay in regular contact with the borrower and periodically check on the loan repayment status. This helps avoid unexpected financial liability.