Guaranteeing a loan can impact your financial health
Your guarantee on a loan can affect your credit score negatively and even reduce your own chances of getting a loan.
Today, banks and lending companies offer credit and loans at highly competitive rates and have made access to a house, car and education a whole lot easier. However, contrary to popular belief, getting a loan doesn’t solely depend on the borrower’s financial health. If the lender feels that the borrower’s financial standing is not credible enough, the lender asks the borrower to get a guarantor.
When you sign a guarantee, you agree to take responsibility for the repayment of the debt in the event of a default. Therefore, it will show up on your credit statement just like all your other financial liabilities. Consequently, if the borrower defaults, it will have a negative effect on your CIBIL credit rating.
A lender on his part will ensure as far as possible,that the borrower is capable of repaying the loan he is undertaking with due interest. However, in the event the borrower does default, a guarantor’s role becomes crucial as he becomes the backup option from whom the lender can demand due payment. Lenders insist on guarantors for loans for which there are no appropriate collateral, such as education loans. They can even insist on a guarantor if they have doubts about the borrowers repaying capacity.
How does it affect your credit worth?
A guarantor is legally responsible for repaying a loan if the primary borrower defaults and thus he indirectly assumes the onus of repayment. Therefore, the creditworthiness of the guarantor is of substantial importance and a loan sanction directly impacts the guarantor’s credit report and score. The lender, in fact, asks for the guarantor’s credit report for verification purpose when he applies for the role.
Even if the guarantor is financially disciplined with an unblemished credit history, a default or even a late payment by the borrower will have a negative impact on the guarantor’s credit history. Therefore, you should keep in mind that the moment yousign as a guarantor for a loan it will show up on your credit report as well, which in turn is used by lenders to ascertain your credit worth.
Furthermore if you decide to stand guarantee,then you are obligated to back it up all the way. You cannot choosethe limit of liability towards the loan. So it is essential that you take into account your own repayment ability before guaranteeing a loan. Guaranteeing will also impact your own chances of getting a loan. A lender might refuse credit or reduce the amount of credit to you if you were already backing another fairly large loan amount at the same time. So bear in mind your own financial goals before guaranteeing a loan.
In many cases a guarantor has been penalised for the borrowers defaults. Even if the guarantor has a spotless credit record, a laxity could act as a deciding factor for creditworthiness when banks access credit reports. Hence, it’s not wrong to assume that your liability, as a guarantor, is more than that of the borrower as you stand to lose a lot more than him.
Think carefully before you stand guarantor as it could have severe repercussions on your financial future.