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    What are the legal liabilities of a loan guarantor?

    Synopsis

    The amount for which you will stand guarantee will reflect in your credit report as an outstanding liability. Hence, understand the legal implications in case of default by a person you stood guarantor for.

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    You can do a few things to protect yourself from the implications of default by your friend.
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    Rishabh is a 35-year-old mid-level executive. He is married and plans to start a family soon. He has been saving for the past eight years to buy a house. His best friend who runs a business, has run into money problems and is in debt. He has applied for a loan and has requested Rishabh to be the guarantor. His friend insists this is a mere formality. Rishbah is keen to help his friend. However, he wonders if this will have any implications on his personal goals.

    Rishabh must understand that the role of a guarantor has multiple financial implications. The most important one being the repayment of the loan in case his friend defaults. As a person who has signed on as a guarantor, Rishabh will have no option but to pay up. He has to consider whether he will be able to find the money to repay the loan if the need arises. Given the fact that he has limited assets he can use, finding the money to repay the loan will put a strain on his income.

    That is not all. The amount for which Rishabh will stand guarantee will reflect in his credit report as an outstanding liability. This will have an impact on his loan eligibility when he himself decides to take a home loan. Moreover, any delay or default by him in meeting his obligations on his friend’s loan will have a negative impact on his own credit score. This in turn will impact his ability to take a loan for his own needs and the cost at which he gets the credit facilities.

    Rishabh may still decide to stand guarantee given the relationship. However, he can do a few things to protect himself from the implications of default by his best friend. He can suggest that a loan payment protection plan be taken so that in the unfortunate event of death or disability of his friend, the repayment will be taken care of. He can also suggest having multiple guarantors, and he stands guarantee only to the extent that his savings and income will bear. Another arrangement could be that he stands guarantee as long as it takes for another guarantor to be found and then his role as guarantor is terminated.

    This way Rishabh will be able to help his friend in the time of need and at the same time his own borrowing limit will not constrained by the outstanding liability of the guarantee when he himself plans to take a loan.

    (Content on this page is courtesy Centre for Investment Education and Learning (CIEL). Contributions by Girija Gadre, Arti Bhargava and Labdhi Mehta.)
    (Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com.)

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