Asked to be a friend’s loan guarantor? Know these financial risks before you agree to help, and when to avoid saying yes

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:

• Legal consequences: If the borrower defaults, you may face legal action from the lender to recover the debt. This could happen even if the default is caused by unforeseen circumstances such as the borrower’s sudden death.
• Difficulty exiting the agreement: Once you sign as a guarantor, withdrawing from the arrangement is not easy. The lender must agree to release you, which may require the borrower to arrange another guarantor first or provide a collateral such as gold or property.
• Impact on credit score: If the borrower defaults on their payments, your credit score may fall. Often, lenders do not inform guarantors about the borrower’s timely payment issues, leaving you unaware of the damage.

When to say no for becoming a loan guarantor

Before you commit to your friend about becoming their loan guarantor, it’s a prudent approach to first check the said friend’s financial stability and repayment history. You can also ask the borrower for their credit report.

Also read the guarantee agreement carefully, seek legal advice if needed, and understand your obligations in case of a default. You must also stay updated on EMI payments to spot any repayment delays early.

If possible, you can also consider having co-guarantor to share the responsibility, although this does not automatically limit your liability. If you spot any discrepancies in your friend’s credit report or see a trend of them relying on credit for daily expenses, it’s better to say no to the arrangement.