Know how becoming a loan guarantor can affect your credit score
New Delhi: If you are guarantor of someone in default, you could find yourself in trouble. When you sign a Guarantee, you agree to be responsible for paying the debt in the event of default. Therefore, it will show up on your credit report like any other account for which you are responsible. If the borrower defaults on the account, it will have a negative effect on your CIBIL credit score.
As mentioned earlier, defaults on premiums made by the primary borrower are also reflected in the newly opened credit account which becomes visible in the guarantor’s CIBIL report. This affects the debt-to-income ratio of the guarantor, minimizing his solvency. The longer it takes for the primary borrower and guarantor to correct defaults, the more detrimental the effect will be on both their CIBIL scores and reports. Their scores decrease with each default and are reflected in their credit history for the next three years.
It’s also worth mentioning that becoming a loan guarantor would reduce your ability to take out a loan. If someone is a guarantor of a loan, their eligibility for the loan is lower than they would have been if they had not been a guarantor. Additionally, if the borrower defaults on the loan, this will be reflected on the guarantor’s credit report. Although a guarantor is responsible for a loan, usually on a secured loan, such as a home loan, the bank will try to sell the collateral to collect the loan amount.
In addition to accurately analyzing the extent of the negative consequences, it can be tricky for you to refuse the request to become a surety. Indeed, these requests are usually made by friends, family members and acquaintances. Becoming a guarantor of small personal loans and short-term loans is comparatively less risky. For long term loans, it is recommended to opt for an additional guarantor to share the debt burden, in case such a situation arises. Payment insurance will also be useful in the event of the death of the borrower.