The role of a guarantor in loans

• Posted by Evert Chris Dimalanta January 29, 2014 - Filed in Other - 999 views

  Varun and Shiva are good friends. Because Varun is kindhearted towards his friend Shiva, he agreed to lend his name when the latter obtained a loan from the bank to expand his business. After quite some time, their friendly relations gone sour and they ended up not in talking terms. After a year, Varun received a demand letter from the bank’s legal department, asking him to pay the outstanding loan balance of Shiva who failed to pay his loan obligation. Varun refused to pay arguing that he did not benefit from the loan proceeds. Is Varun’s contention tenable?

  
  According to the Indian law on obligation and contracts, if the principal borrower defaults in the payment of his loan obligation and his whereabouts becomes unknown, the guarantor has to pay his debt. Being a guarantor is not only about lending credence to one’s name but assuring the creditor that he will be paid by the principal debtor, and in his default, by the guarantor. This is a form of security for the bank especially if the borrower has no good credit history. Some banks may not ask for a guarantor though. However, they will ask for a co-borrower who has the same role and liability as a guarantor. This is very crucial since the bank can go against the properties of the guarantor or co-borrower even if he did not anything from the loan proceeds. Failure on his part to comply with the bank’s demands would also create a negative impact on his own credit history. Thus, one thing should be kept in mind, before agreeing to be a guarantor, make sure that the principal borrower has the capacity and honest intent to pay. Therefore, in the case above, Varun cannot escape liability in paying the unpaid debt of Shiva.