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Role of the guarantor in a loan

A guarantor has to the pay the dues if the borrower defaults on the loan

 

WHILE helping a friend in need is indeed a virtue, it is best to exercise caution when it comes to money. This is particularly true while standing surety to a loan taken by an acquaintance. Banks typically ask the borrower to rope in a guarantor to protect themselves in case the borrower fails to repay his/her dues. In such an eventuality, the lending bank has the right to initiate proceedings against the guarantor to recover the dues. In fact, depending on the agreement signed, the bank can move against the guarantor simultaneously with the borrower or even independently.


   The surety cannot request the bank to exhaust other options before serving the notice. In other words, if the borrower has offered his/her assets as collateral, the bank need not wait till the process of staking a claim on the same is completed.


   The liabilities of the guarantor are completely intertwined with those of the borrower as the former is under an obligation to repay the amount if the latter fails to honour the commitment. Remember, wriggling out of the situation at a later date is next to impossible. Though you can try to get someone else to be the surety, accepting or rejecting the proposal will be entirely up to the lender.


   There is little that you, as a guarantor, can do once the default occurs, which makes it imperative for him/her to exercise extreme caution while accepting the terms and conditions of the agreement. The key is to satisfy yourself of the borrower's repayment capacity before giving your assent.


   Also, you need to know that if you do not give your consent when the credit limit is being enhanced, your liability will be limited to the initial loan amount. To that effect, you should ask for the insertion of a clause freeing you of the commitment in the event of the original agreement being modified later, without your permission.


   This apart, you should ensure that the agreement does not bind you into an unlimited liability. That is, you should seek clarity on the extent of your liability in the agreement. For instance, if it will hold even in the event of a willful default. Also, thoroughly scrutinise the procedure that is to be followed by the bank before invoking the guarantee.

 

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