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4 ways to quit your role as a loan guarantor

By Rajiv Raj
May 06, 2015 09:00 IST
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It is not very easy to wriggle out of your role as a guarantor in case the original borrower defaults. Nevertheless, you can still come out of the situation with your credit record intact.

Becoming a guarantor for a loan is a huge responsibility. It means you are providing a guarantee to the lender that you shall repay the debt of the borrower if s/he is unable to do so if such a situation may arise. But what if you decide, after some time, that you want to be relieved? This is a situation that is difficult to wriggle out of, but long story short, it may still be possible, subject to some tough conditions.

Let's take a closer look.

You have been magnanimous and become a guarantor of the loan that a friend or a close relative has taken, but after a while you decide that it has not been your wisest move and you want to opt out. If you don't and the borrower becomes a defaulter on her/his loan you will be made equally liable for it. As a result, not only will the lender come after you, it will be a blotch on your CIBIL report and bring down your CIBIL score drastically. This, in turn means that if you do not pay up the outstanding, you will not get access to credit when you need it. Needless to say, that is a heavy price to pay.

When you decide to opt out, you will have to approach the lender directly with an application. Unfortunately the discretion is solely dependent on the lender whether or not it will let you go. The bad news is that, in the face of rising bad loans that is crippling the banking industry, the lender may not be willing to relieve you. This is because, it has probably tried all the ways and means to get the borrower to pay up her/his debt and failed. The good news is there are some circumstances under which you may be relieved.

1. An additional loan is granted without your consent

If you find that the borrower has taken an additional loan over the original amount that has been sanctioned without your consent, you may ask the bank to relieve you. However, you will still be liable to repay the outstanding on the original amount sanctioned.

2. A substitute guarantor for the loan

You may also approach the bank with an application for a release if there is a substitute guarantor for the loan. If the bank is really convinced why you are opting out and is convinced about the credentials of the substitute borrower, it may set you free. In such a case, your CIBIL score remains intact as the loan is closed as far as you are concerned.

3. Get the borrower to pay back

This seems a little far fetched, as you would not have to bother about opting out if the borrower was making timely repayments and had intentions of paying up her/his entire debt within the stipulated time frame. However, you can indeed give this a shot. If you have been a guarantor for someone's loan, it's obvious that you know her/him very well. Try to make her/him see reason and help her/him out as much as you can to repay your debt. If it means seeking the help of other close relatives or friends, do so at the earliest.

4. Take legal action

If you have granted the bank a hold over some of your tangible assets when you were guaranteeing someone else's loan, the bank will auction the same to recover the outstanding. However if these assets are in the real estate space and are either under mortgage or is an under construction property, you can fight your case saying that it has not been fully paid for.

Since the bank tags the guarantor as a "willful defaulter" when the borrower does not pay up, you could also approach the judiciary saying that at the time that you had stepped in as a guarantor, there were no signs of the borrower defaulting. Just because the borrower has turned truant, does not mean that you are too.

If you manage to come out of the situation you must have a discharge letter from the bank stating that you are no longer liable for the outstanding amount as on the date when your guarantee has been revoked. In such cases you may actually get away with a unscathed CIBIL score.

However, it may serve you well to know that in each of the circumstances mentioned above, the scales tip heavily towards the bank. When you sign up as a guarantor, you are giving the bank to invoke this guarantee at any point of time. As a result, the lender can sue you anytime.

There have been many cases when guarantors were put in a tough spot and had to pay up substantial chunks of money to avoid facing legal action. Being a guarantor is as good as availing of the credit facility yourself so think about it carefully before you make any decisions. It's tough to say no to people who may matter to you, but you cannot possibly put your financial future in jeopardy.

Illustration: Uttam Ghosh/

The author is a credit expert with 10 years of experience in personal finance and consumer banking industry and another 7 years in credit bureau sector. Rajiv was instrumental in setting up India's first credit bureau, Credit Information Bureau (India) Limited (CIBIL). He has also worked with Citibank, Canara Bank, HDFC Bank, IDBI Bank and Experian in various capacities.

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Rajiv Raj