How Being a Loan Guarantor Affects Your CIBIL Score

Becoming a loan guarantor is a significant financial responsibility that can affect your creditworthiness. While it can help someone secure a loan, it also impacts your CIBIL score and overall credit profile. As a guarantor, you share the liability if the borrower defaults and this could directly affect your score. Understanding how this role influences your CIBIL score is essential for making informed financial decisions and protecting your credit health. To begin, let’s first learn about what the role entails to get a better understanding of how it affects your credit profile.

A credit guarantor is someone who agrees to repay the loan in case the primary borrower defaults. Here are some essential things about being a loan guarantor that you should know about before making the financial commitment:

Providing Assurance to Lenders

The guarantor’s presence reduces the lender’s risk, making it easier for the borrower to secure a loan. This is especially the case if the borrower has a low credit score or insufficient income.

Sharing Legal and Financial Liability

If the borrower defaults, you, the guarantor, are legally obligated to repay the outstanding loan amount. This is inclusive of the interest charges and penalties.

Limited Control Over Loan Management

As a guarantor, you typically have no control over how the borrower manages the loan. However, you bear the consequences if they default. Regularly checking on their repayment progress is thus essential to maintain a healthy credit profile.

Legal Responsibility in Case of Default

If the borrower defaults, the lender can initiate legal proceedings against you, the guarantor. This may lead to the seizure of your assets or wage garnishment, commonly known as attachment of salary. It is a legal process where a portion of your salary is withheld by your employer to pay off a debt. This process is governed by The Code of Civil Procedure (CPC), 1908 under Order 21, Rule 48 for debt recovery.

Impact on Credit Profile

Your credit score could be impacted because the loan for which you act as a guarantor will appear in your credit report. It may lead to an increase or decrease in your score, affecting your chances of getting a loan in the future.

It is crucial to understand how becoming a loan guarantor can affect your credit score. Since you are a guarantor, the loan is considered part of your financial obligations. Hence the loan details are reflected in your CIBIL report, affecting your CIBIL score. Being a guarantor can influence your score positively and negatively. If the primary borrower repays the loan on time, it reflects well on your credit profile, showcasing your reliability and financial trustworthiness. 

 

Meanwhile, if the borrower delays payments or defaults, your score may drop substantially. Additionally, the loan affects your DTI ratio as the borrowing becomes a part of your financial obligation. This affects your chances of getting a new loan or credit card as most lenders usually review this ratio before approving any new credit.

Here are some other risks you may face when becoming a loan guarantor:

Liability for Loan Repayment

If the borrower defaults, you are legally required to repay the outstanding loan amount, including any accrued interest and penalties

Financial Strain

Taking on the guarantor role can lead to unexpected financial burdens. This is especially the case if you need to repay the loan on behalf of the borrower which puts a strain on your finances.

Damaged Credit Score

Any missed payments or defaults by the borrower will appear on your credit report. This could lower your credit score and affect your creditworthiness.

Limited Borrowing Power

When you become a guarantor, the loan you’re guaranteeing is considered part of your financial responsibility. Even if you’re not making the payments, lenders treat it as a potential debt because you are legally obligated to repay if the borrower defaults.

Risk to Personal Assets

In extreme cases, lenders may initiate legal proceedings to recover the debt. If you are unable to repay the debt, your assets may be at risk of being auctioned by the loan provider for recovery.

Being a guarantor is a significant commitment and should be considered carefully, as it involves financial and legal risks. Here are key points to consider before committing:

Check the Borrower's Financial Health

Verify the borrower’s income stability, credit history, and repayment capacity to assess the likelihood of default

Read the Agreement Thoroughly

Understand all terms, including the extent of your liability and the conditions under which you might be asked to pay the dues. Check the penalties, late payment fees, and other essential clauses which may be applicable in case of missed payments and default.

Monitor the Loan’s Repayment 

Stay informed about the borrower’s repayment status by checking loan statements to ensure timely payments

Assess Your Own Financial Stability

Consider whether you can handle the financial burden if the borrower defaults. Ensure you have sufficient savings or income to cover the loan without jeopardising your financial health.

Be Aware of Potential Legal Action

If the borrower defaults, lenders may take legal action against you to recover the outstanding loan amount. Check the relevant terms and conditions in the loan agreement and get complete clarity from the loan provider regarding this matter to avoid any surprises and losses.

 

By considering these factors, you can make a well-informed decision and protect your financial interests while supporting the borrower.