A loan guarantor may be responsible for a borrower’s debt, interest and penalties after default. Before signing, one should consider certain risks and know when to decline the arrangement.
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Your friend asks you to stand as a guarantor for their loan and saying yes may seem like a simple way to help them. But, one must understand that the decision comes with financial and legal responsibilities that can outlast the friendship.
A loan guarantor is an individual who agrees to repay the debt if the borrower fails to do so at the time. Banks may ask for one when the borrower does not meet their income or credit score requirements, or when the loan amount is substantial or the repayment period is long.
However, becoming a guarantor is not just a formality. You sign a legally binding agreement, known as a guarantee, which outlines your obligation to repay the borrower's loan in case they end up defaulting.
Under Section 128 of the Indian Contract Act, the guarantor is liable to cover the debt, including any accrued interest and penalties. So, before agreeing to help a friend, understand the risks and when it may be wiser to say no.
Risks of being a loan guarantor
In a blog post, published in August 2025, HDFC Bank has flagged some risks that potential guarantors should consider before entering into a loan guarantee agreement. Here are four key risks to assess before agreeing:
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