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Being a Loan Guarantor – Are You Risking Your Future?

Last weekend i was watching the movie “Aarakshan” & was moved by the scene  wherein Amitabh Bachchan could not get the possession of his own house during Bad Times becoz during Good Times in order to help the Children of his close friend, he became Loan Guarantor of their Business Loan. Not only he risked his future but also of his family..I think, this topic cannot be explained more simpler then this. Just to add, things in real life cannot be sorted out as easily as shown in the movie.

Let us understand this topic in detail, For simplicity purpose i will list down complete details in points

1. In layman terms if u are becoming a Loan Guarantor then its as good as you  are contractually undertaking the complete legal responsibility or liability to pay the balance loan amount in case of default i.e. in case person who took the loan defaults due to x y z reasons then Bank will knock your door for recovery of balance amount. In case you also refuse to pay then besides Borrower, you will be also declared as Defaulter and bank can exercise any option to recover the amount including attaching your property etc.

2. Banks always ask for Loan Guarantor only in dubious cases i.e. where the bank is also not sure that Borrower can payback the Loan amount…In a nutshell for all risky cases i.e. where probability of default is high, Banks ask for Loan Guarantor….Before signing documents as Loan Guarantor, be clear that risk of default is very high

3. Assume you became Loan Guarantor of Person A, who took loan of 40 Lacs and after few years u planned to buy your own house…You applied for a Loan of 60 Lacs according to ur self calculated eligibility…Now while sanctioning the Loan Amount, Bank will know that you are Loan Guarantor of Person A therefore while calculating your eligibility, Bank will reduce the Loan amount guaranteed by you and sanction the balance amount i.e. in this this case u have already guaranteed 40 Lacs of Person A and your Eligibility is 60 Lacs therefore bank will only sanction 20 Lacs instead of 60 Lacs applied by you becoz you already Guaranteed 40 Lacs which is your liability also…In case, you have guaranteed amount equal to your eligibility then your application for Loan will be rejected. Secondly the amount guaranteed by you as loan guarantor will reflect in your CIBIL score, which automatically will reduce your score and thus Loan eligibility.

4. Now you will say, i became Loan Guarantor without knowing its cons and i will write to bank that i wish to back out from Loan Guarantor Agreement…Its not that easy my friend, You cannot back out just like that. First borrower need to find out another Guarantor and than you can get out of this arrangement..In case Borrower refuse to do so than you are stuck.

5. Another Scenario, you are Loan Guarantor for Person A and you also have Home Loan against property…Now person A default on payment but you are paying your EMI’s on time…Suppose you completed your Home Loan Tenure and paid entire amount to bank…After closing Home Loan, most important part is to collect No Objection Certificate from Bank but since Person A is defaulting  on his loan than Bank will not issue your No Objection Certificate till either person A or you don’t clear outstanding amount of Person A Loan becoz you are Loan Guarantor.

6. From above points its clear that there is no escape route infact. Now you must be wondering that i guaranteed the Loan in Bank A and  i am applying or have loan with Bank B then how Bank B will come to know. Just to inform that all lenders are now consolidating the database & creating single database of all Borrowers so that people cannot borrow multiple times against same property so with just a click of mouse, banker will know complete history on borrowing, default and payment history. Secondly CIBIL report capture all details of credit history so no escape route

I am not discouraging you from being Loan Guarantor, May be tomorrow your parents, brother, sister or any other very close relative require your help & request you to become Loan Guarantor but before signing the dotted line, Think not once or twice but 1000 times becoz by being a Loan Guarantor, you are not only risking your future but also of your immediate family. In the battle of Heart and Mind, listen to both of them but take decision only from mind not from heart :)

Copyright © 2011-2012 Nitin Bhatia. All Rights Reserved.

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Indianist Online
Indianist Online
11 years ago

pls Help me how to increase the CIBIL Score?.I want to get a car loan and house loan but the bank regect my application due to CIBIL Score.

rishitagupta
rishitagupta
11 years ago

a query:what if a person who is a gaurantor for his brothers home loan,over a period of 5 yrs the gaurantor develops a low cibil score due to his own credit cards default.but his brother has a good recxord with cibil,is it advisable for the elder brother who is the gaurantor to withdraw from his brothers home loan gaurantorship.will that improve his credit rating

Nitin Bhatia
Nitin Bhatia
10 years ago
Reply to  rishitagupta

Being a Guarantor does not impact your CIBIL score…Only in case of default by original borrower and subsequent default by Guarantor impacts CIBIL score.

Tarun
Tarun
10 years ago

Good to know that

chattar pal singh
chattar pal singh
9 years ago

i had been guaranter to my colleage in personal loan.but my colleage became defaulter.now the civil court had attached my one third salary along with loanee.i am govt employee.can court attach my salary while loanee is alive.his one third salary is also attached.

Nitin Bhatia
Nitin Bhatia
9 years ago

Court can very well attach your salary or any other asset to recover the dues. The liability of a Guarantor is same as that of a Borrower. I have explained it in my post.

jd
jd
9 years ago

How to fight a case in this case if we are a guaranter for a loan more than 10 Yr old. Person is alive and is a 51% partner of Firm. In this case also bank can force to guaranter?

Nitin Bhatia
Nitin Bhatia
9 years ago
Reply to  jd

Bank can force guarantor to pay in case of default by the borrower. Legally the case is very weak. You need to check liabilities of guarantor as mentioned in the agreement.

Jig
Jig
9 years ago
Reply to  Nitin Bhatia

Thanks for reply.

Gurpeeet Singh
Gurpeeet Singh
9 years ago

My father was an employee at a private firm and the owner made him sign as a loan guarantor along with his wife and son. Now my question is…. how can a bank accept the loan form, where a person earning 15-20k a month, is a loan guarantor for 5 crore rupees and that too in the same firm. What’s the risk of being prosecuted for it? Our house is registered on my father’s name…. should we transfer it on my name for any future risk?

Nitin Bhatia
Nitin Bhatia
9 years ago
Reply to  Gurpeeet Singh

Seems he is guarantor for business loan of owner. In case of default, bank can attach the assets/bank accounts of guarantors of business loan.

Transferring home will not help. Reason, normally heirs & successors are also included in business loan. For more details, you can check the papers signed by your father. Based on that future course of action can be decided.

manmohan singh thathera
manmohan singh thathera
8 years ago

sir my brother take a mortgage loan of 90 lakh on our parental house and include me as a co applicant. i want to know my risk and liabilities on this account. i am a government servant with gross salary 45k per month.

Nitin Bhatia
Nitin Bhatia
8 years ago

You have not mentioned who is the owner of the property.

manmohan singh thathera
manmohan singh thathera
8 years ago
Reply to  Nitin Bhatia

This is our parental property and younger brother is the sole owner of this property.

Nitin Bhatia
Nitin Bhatia
8 years ago

If your brother default on payment then it will be your responsibility to clear the dues. For other risks, please check the post on this page.

manmohan singh thathera
manmohan singh thathera
8 years ago
Reply to  Nitin Bhatia

Sir.Thanks for your reply.i want to know how to remove my name as co applicant from said loan

Nitin Bhatia
Nitin Bhatia
8 years ago

Your brother can transfer home loan to some other bank in his name.

nachiket
nachiket
8 years ago

dear sir my friend has taken loan from bank and he has not paid the balance amount of his loan of rs18000/-as i am guarantor of his personal loan due to which my cibil score got adversely affected so kindly help me to know that if he repays loan till what time my cibil score will get increased

Nitin Bhatia
Nitin Bhatia
8 years ago
Reply to  nachiket

It depends how the bank will report the payment in CIBIL database. There are multiple scenarios like DPD, settled, written off etc.

akhilesh
akhilesh
8 years ago

my father take a vehicle loan (four wheeler) for the start the business to my younger brother(travel agncy) and it was decide in family that my younger brother will pay EMI. an i am guarantor for loan, but after 3 month EMI not pay by brother. after a year bank hold my salary account to told to me for repay loan amount . in my account amount show’s in minus(-). i want to ask u that can i back out from loan guarantoe in this sitiuation or what can i do for this

Nitin Bhatia
Nitin Bhatia
8 years ago
Reply to  akhilesh

You cannot dissolve yourself from being guarantor. As i mentioned, you are equally responsible for loan repayment.

Vinod
Vinod
8 years ago

Hi Mr Nitin,

I have seen many ads in which some pvt lenders giving home loan / personal loan and property loan with 5% per annum interest. Is it possible to get loan at this rate of interest and their documentation includes guarantor also .

Nitin Bhatia
Nitin Bhatia
8 years ago
Reply to  Vinod

It is not possible. There must be some catch. You should check complete details. Normally private lenders charge anywhere between 15% to 30% interest rate.

vikram bandam (coolskiesboy)
vikram bandam (coolskiesboy)
8 years ago

does bank will advice insurance to gaurenteer ?? or they advice only for borower?? please answer

Nitin Bhatia
Nitin Bhatia
8 years ago

Both scenarios are possible. Ideally, it is advisable only for borrower.

vikram bandam (coolskiesboy)
vikram bandam (coolskiesboy)
8 years ago
Reply to  Nitin Bhatia

Thank you sir, My mother took a house loan of amount 25L, in sbi, for which the staff advised to get insurance covered for that house loan, my sister is gaurentor for her, the policy we got from sbi life insurance Rinn raksha is in the name of my sister and the policy says that my sister took that loan and insurance is upon her,( nominee is my father, but he is already expired as bank manager 5yrs ago) bank sanctioned 23L for us in my mother’s account, that means she is the borrower, recently my mother expired, now the question is can we claim the insurance? Or is there any mistake in the policy that insurance company made….should I keep a case on consumer court about that mistake..? How can someone leave borrower and keep insurance on gaurenteer…??

Nitin Bhatia
Nitin Bhatia
8 years ago

Please let me know whether your sister is co-owner of the property or not.

vikram bandam (coolskiesboy)
vikram bandam (coolskiesboy)
8 years ago
Reply to  Nitin Bhatia

Currently, she’s not the co owner of the property, the site is registered in my mother’s name…

Nitin Bhatia
Nitin Bhatia
8 years ago

You can seek written clarification from bank in this regard. Also demand photocopy of insurance proposal form. If it is signed by your mother in favor of your sister then nothing much can be done. You can also demand this info through RTI. If it is bank’s mistake then you can claim compensation through consumer forum.

Also when you received insurance policy, you should have highlighted at that time.

kamal
kamal
8 years ago

Hello sir, i need your suggestion for my problem.
i became guarantor for my friend for 2L. he paid only 4 installments the rest have to be done. after 2 years i got notice that my friend is not paying now it became 2.5 lakh including the interest. the bank claims that my friend has changed the address and mobile number. they cannot contact them. but i have permanent home on my fathers name. i want to know if my friend didnt pay . the recovery will be from my fathers home . please suggest me in this scenario. i will be thank ful for ur suggestion.

Nitin Bhatia
Nitin Bhatia
8 years ago
Reply to  kamal

Bank cannot recover from your father or through/via his assets. At the same time, your liability is same as of your friend therefore bank will demand and recover 2.5L from you.

Abhishek
Abhishek
8 years ago

Hello sir, my dad was a guarantor of his friend for a house loan. But his friend stopped paying after sometime and now he is in some other city, and neither us nor the bank has any information about him. So do we have to pay the loan or is it possible that the bank will seize the house and we don’t have to pay?

Nitin Bhatia
Nitin Bhatia
8 years ago
Reply to  Abhishek

As i shared in my post that if the primary borrower default then bank recover the money from guarantor. The bank may auction the property if the guarantor fails to clear the dues.

Beulah D
Beulah D
8 years ago

Dear Sir, I am a guarantor of my sister’s son. Now his vehicle got accident and insurance has been rejected. He had owned this car through a financial service and please let me know the risk being a guarantor

Nitin Bhatia
Nitin Bhatia
8 years ago
Reply to  Beulah D

There is NO Risk till he pays EMI on time. Only negative is that being a guarantor impacts your CIBIL Score negatively.

Mahendran
Mahendran
7 years ago

Dear Sir,
Should the Guarantor produce any documents or document copies to the bank. What are the documents to be produced to the bank (SBI). if I am a Guarantor for Person X for his Housing Loan.

Nitin Bhatia
Nitin Bhatia
7 years ago
Reply to  Mahendran

You have not mentioned for what purpose. For loan application, a guarantor need to provide PAN and Address/Identity Proof.

Aakash Kotwani
Aakash Kotwani
7 years ago

My father was the guarantor of his friend car loan 8 yr ago the loan was to be settle 2 year back he has paid till now 4 installment and he has run away and his car is not been able to trace so will my father have to pay loan as it has been long time after the bank has reported us if they would have came earlier me would be able to caught that person

Nitin Bhatia
Nitin Bhatia
7 years ago
Reply to  Aakash Kotwani

Being a guarantor of car loan, your father is liable to pay the balance outstanding.

Sangam
Sangam
7 years ago

Hai sir I am working in private firm I am going to gauranter to my friend in can home fin ltd they will accept me as guarantor my salary is eleven thousand and I have personal loan emi four thousand they will consider me as guarantor or not

Nitin Bhatia
Nitin Bhatia
7 years ago
Reply to  Sangam

It depends on the risk assessment by the bank. I doubt that they will include you as a guarantor.

Kinkar Biswas
Kinkar Biswas
7 years ago

I am one of the two guarantors of my friend’s house building loan of Rs. 9 lacs from west bengal state co-operative bank 5 years ago. We are Assistant Teachers of a high school of WB Govt. In bank’s loan deed paper there is no agreements details related the guarantor only a place for signature of the guarantors. A signature has been made on a dummy paper under the amount of loan but no signature on stamp paper. No guarantor responsibility is mentioned. All the papers related to land deed have been deposited in original which costs higher the loan amount. My friend has not repay a single amount for 5 years. Our salary a/cs are in different bank. What are the risks of the guarantors in this case ?

Nitin Bhatia
Nitin Bhatia
7 years ago
Reply to  Kinkar Biswas

I cannot comment without going through the documents signed by you. I suggest you to hire a local lawyer who can go through the documents and suggest accordingly.

Manish
Manish
7 years ago

sir,
i am a loan guarantor for a loan of rs 35lakhs, whose second guarantor is father of the loan borrower. i didn’t know such grave implications of being a guarantor so didn’t enquire much about him, now i have come to know that he owns nothing, can i transfer my property to my wife to get away with this or can the bank seize my child or my wife’s property

Manish
Manish
7 years ago
Reply to  Manish

I have give my khasra khatauni papers signed

Nitin Bhatia
Nitin Bhatia
7 years ago
Reply to  Manish

i don’t think so that it will help & depend on the terms & conditions signed by you. In my opinion, you can sell your property and gift the money to your son if he is major.

Manish
Manish
7 years ago
Reply to  Nitin Bhatia

The bank manager is saying that the i cannot give u the copy of documents signed by you as they are confidential. I cant understand how can papers signed by me can be confidential, now that the borrower has destructed the floor mill, on which he has taken loan and the bank has given the notices to me and the father of borrower( who is second guaranter) to restart the mill in 20 days otherwise they would recover the amount and the bank has mentioned me as first guaranter and defaulter father as second guarantor, Is there something known as primary and secondary guarantor, sir please help or suggest me as i am feeling cheated. as after becoming guarantor i came to know that rs 35lakhs loan is breaked in 2 parts one is of 7 lakhs and other is the limit of 28 lakhs.
what should i do.

Nitin Bhatia
Nitin Bhatia
7 years ago
Reply to  Manish

I have not seen the documents therefore cannot comment what all is possible but as you are 1st/primary guarantor therefore, bank will first try to recover the money from you. Unfortunately, now you cannot dissolve yourself from the responsibilities of a guarantor.

Money
Money
7 years ago

Hello Mr. Nitin,
I need your expert advise. I have booked 3 bed room (1495 sqft) flat in Aug 2012 in Sahara City Homes, Lucknow, paid 15 my own money + 30 lac loan from LIC, 95% money already paid to builder, possession was due in Oct 2014, but Sahara group is nowhere close to delivery that tower and project future is completely uncertain. I am keep paying LIC EMI 35k every month which hurt me lot. I also filed consumer court case but its just keep dragging from last 2 yr, no conclusion as such. This property will cost me 83 lacs almost (15 cash I paid + 30 lacs LIC loan + 30 lacs Interst 15yr loan + 8 maintenance and registry charges). I don’t see this property is going to be appreciated in future at all due to bad image of Sahara in market, so I am nowhere to make any money from this property. This was my investment property. My current problem is LIC EMI and want to get rid from that as my financial situation is not good. I could see only 3 path.
1) Become defaulter – This has negative consequence such as loosing CIBIL rating, auction of property, for both I am OK as I do not have any interest in this property anymore nor planning to take any loan in future, but there is co-applicant in loan my father, grantor is my uncle, both are retired and I don’t any complication created for them coz my decision to become defaulter.
2) Keep paying regular EMI- it will take another 12.5 yr to me to finish this loan. property possession is uncertain, but there is no negative impact on my parents and my uncle, and I might win through my consumer court which I have filed and might get my principal back with 18% interest rate.
3) Early payment of LIC loan – If i get possession somehow in next 4-5 yr then repay my loan early to reduce the property cost and then sale after sometime when it cross my sale price.
Please advise which option is best for me, or any other option you could think off.

regards,,
Money.

Nitin Bhatia
Nitin Bhatia
7 years ago
Reply to  Money

I can understand your concerns. Option 3 is not feasible right now as it is based on assumption that you will get possession in 4-5 years. From rest 2, i will suggest option no two as it is more logical.

At the same time, you can put your property for sale and search for buyers. The best scenario is to sell the property.

Money
Money
7 years ago
Reply to  Nitin Bhatia

Thanks a lot Mr. Nitin for providing your opinion, really appreciate the same, regarding sale of unit, I have already tried, no one will buy Sahara property as their name got lot of defame, Also property does exist in only paper, people will only interested when clash between SEBI and Sahara will be sorted out and I will have physical possession of unit, I hope you will be aware that issue as every now and then news cover that story, Its scam of 24000 crore which SEBI chasing with Sahara. Do you think I should be taking risk of getting defaulter? in that way LIC will try to recover his money from Sahara, as LIC has their man power to deal with such case, though there is possibility of they failed to recover money and file legal suite against me and Sahara to recover their money and also reduce my, my father and my uncle CIBIL rating. Please advise your opinion on line of getting defaulter.

Nitin Bhatia
Nitin Bhatia
7 years ago
Reply to  Money

I will not suggest. The money is borrowed by you and sahara has no role in the dues recovery except to help LICHFL to recover their dues. Personally, i will not default in such a scenario as the risk is high.

ganesh balaji
ganesh balaji
7 years ago

sir ..my dad is guarantor for his friend loan amount 60laks..in the name of bussiness he took the loan..its been 2 years ..but he not paid the amount…we just got the notice …from the bank ..they will take the legal action…if loan is not paid in 1 week.
my question is 1.will the bank take our home..which cost more than the loan amount..will they give remaining amount
2.the loan taker also have house and some properties..will they take those or gurantor assets

Nitin Bhatia
Nitin Bhatia
7 years ago
Reply to  ganesh balaji

1. If your father has given personal guarantee then answer is YES. After recovering their dues, bank will refund the balance amount.
2. First bank will try to recover the dues by auctioning the guarantees/collaterals of borrower. Any balance amount will be recovered from your father.

ganesh balaji
ganesh balaji
7 years ago
Reply to  Nitin Bhatia

thank u sir

Charanjeet Singh
Charanjeet Singh
7 years ago

My dad is guarantor in the auto loan of 220000 took by our relative. He defaulted the loan and now an arbitrator has been appointed in jaipur ( we are from punjab). Can my dad back out from guarantor, as borrower’s relative is volunteer to take guarantee for the loan payment and to become a guarantor? And if not then can we ask financial institution to carry out arbitration process in punjab as per section 20 of Arbitration and Conciliation Act, 1996?

Nitin Bhatia
Nitin Bhatia
7 years ago

1. The place of arbitration can be decided by the bank and the defaulter. As a guarantor your father cannot invoke section 20 of Arbitration and Conciliation Act, 1996
2. As the matter is under arbitration therefore now your father cannot back-out as guarantor even if another person is willing to become guarantor of the loan.

Sidhtharthan Segarin
Sidhtharthan Segarin
7 years ago

Sir,
I am loan guarantor of my friend who took 1 lac as a personal loan from a private bank. He didnt repay and absconded. From your discussions, I came to know that am liable and I need to repay the loan. I am not aware of the documents that i’ve submitted.

An advocate form bank called and asked me repay the whole amount (124000) in a single installment by today. He also said that the case is going to be executed tomorrow and if that happen I’ll will be arrested on non bailable 15 days remand. I had no prior notice from the bank or the advocate.
After I said I couldnt pay the whole amount and asked him whether I can pay in emi’s?
He refused and said it is not possible to pay in emi’s and asked me to pay 20000 to the bank immediately to hold the case from executing further. And if I couldn’t pay this he asks me to take bail early to avoid the consequences of getting arrested tomorrow.

So, will it lead to arrest for being a loan guarantor?
Is it not possible to pay the amount in emi’s?

Nitin Bhatia
Nitin Bhatia
7 years ago

Relax !! You need not worry. You will not be arrested. These calls are initiated by recovery agencies.

At the same time, you are liable to clear the loan of your friend being a loan guarantor. You may ask for credit score masking to clear the loan from your credit report. You may check my following post for more details

https://www.nitinbhatia.in/improve-credit-score/

Nitin Bhatia
Nitin Bhatia
7 years ago

Settlement will not help your credit score. As a loan guarantor you are equally responsible for loan repayment. You should explain your relative the implications of being a loan guarantor.

chetan shah
chetan shah
7 years ago

hello sir,
My father in law wants to take a new flat as his son is going to marry soon for which he is transfering his existing flat to his elder daughter(my wife’s elder sister)by way of gift deed. Now as she can not apply for Home loan without guarantor, he wants me to be the same on top of this my wife has to sign the NOC for the Gift deed in which she agrees for the transfer and my father in law verbally is telling me that he will pay her share after some time. The situation is that the Elder daughter is getting the old flat, father in law,mother in law & the Son are going to get the benefit of the new flat but neither my wife is getting her share & on top of this they want me to be the guarantor for which i am planning to refuse. plz advice.

Nitin Bhatia
Nitin Bhatia
7 years ago
Reply to  chetan shah

I agree with your decision. You should refuse to become loan guarantor.

chetan shah
chetan shah
7 years ago

sir please reply..

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