7 critical RISKS of being a loan guarantor in India | All you should know to ensure your credit score, finances are safe

India is a country that cherishes relations, humility, and affection. Perhaps that is why being a loan guarantor might easily appear to be a mere act of kindness. However, it is important to acknowledge that being a loan guarantor entails high risks and complications you should be aware of.

Below are seven key risks of being a loan guarantor in India:
1. Primary liability for debt

As a guarantor, you are legally obliged to pay the loan if the main borrower fails. This is to say that lenders may sue you for loan repayment without trying to recover from the borrower, placing unnecessary financial pressure.

Legal provisions such as the Indian Contract Act, 1872’s section 126, 128, 133, 139, among others, are all applicable on loan defaults and similar issues. Other significant provisions including Cheating as defined in section 318, and Cheating by impersonation in section 319 in Bharatiya Nyaya Sanhita (BNS), 2023, are also open for application on select cases of debt liability.

That is why it is always fair to reach out to a dedicated financial adviser and a qualified lawyer to keep yourself safe from legal consequences by properly discussing the borrower’s repayment potential and related ramifications. This will ensure complete clarity on repayment obligations.

2. Effect on credit score

Your credit score can be negatively impacted if the borrower defaults on payments. Any default or late payment is recorded on your credit report, which can lower your score and affect your future prospects of securing loans. So, in all such cases, be ready to face higher interest rates on your future loans or the nixing the possibility of availing loans–if the need arises–due to defaults by your borrower. This scenario is more of a concern as personal loan growth in India has slowed down recently, according to RBI data, indicating a risk-avoiding and more challenging lending environment.

3. Increased financial burden

Remember, in the event of default by the borrower, not only do you have to repay the borrowed amount but also the interest penalty, processing fee and fines charged. This can put an enormous financial burden on you for extended periods of time, particularly if the loan amount is substantial.

4. Legal complications and consequences

The lenders can seek legal action against you in the event of default or missed payments. This means going to court and incurring legal fees, which can further complicate your finances and become a source of constant worry for you.

5. Difficulty in backing out of the guarantee

After you have agreed to act as a guarantor, it is often hard to repeal from this position. The terms of the contract often do not allow for easy withdrawal unless in the case where some conditions have been met, e.g., the borrower deposits sufficient collateral.

A guarantor of a loan through a contract should carefully read, understand it and sign the legal document. It comes with remedies, punishments and sometimes quite challenging legal consequences.

6. Emotional stress

The emotional burden and pressure of being required to repay another individual’s loan can cause enormous distress. Fears over possible financial fallout can strain your relations and your own well-being. It can also make you think about the possible legal complications involved if things suddenly turn in an unwanted direction. That is why you should always be careful with credit and debt tools such as credit cards, personal loans, becoming a guarantor of loans etc.

7. Threat of asset seizure

Do note that if you are sued, then there is a grave possibility of your assets being seized to pay for your borrower’s debt and interest obligations. This is particularly crucial if you have personal assets, including land, gold, silver etc, which are vulnerable.

It is clear that being a guarantor of a loan may be an act of affection and kindness, but the risks have to be carefully considered. It is essential to always check and follow the financial status and repayment capacity of the borrower and consult experts before going ahead with guaranteeing any loan.

(Note: Raising a loan comes with its own risks. So, due caution is advised)