How Does Being A Loan Guarantor Affect Your Credit Score?

These days, most people opt for loans to fulfil life’s basic needs. For instance, banks and NBFCs offer car loans to buy cars, Home Loans to invest in real estate and education loans to fund a child’s education. Funds availed of under personal loans come with zero end-use restrictions and therefore, borrowers can use the money to fulfil all kinds of personal and professional needs. Unfortunately, the growing popularity of loans is also increasing cases of loan default. When borrowers default on loan repayment, lenders suffer and lose money. To reduce the possibility of loan defaults, lenders have started setting strict eligibility requirements. Borrowers who do not meet these requirements often face loan rejection.  

One of the determinants of Home Loan eligibility is the borrower’s credit score. The credit score, often also referred to as the CIBIL score, is a three-digit number between 300 and 900 that indicates a borrower’s creditworthiness and repayment capacity. The higher a borrower’s credit score, the better their repayment capacity. If you are applying for a loan, your online CIBIL score check must show a credit score of 750 or above. If your CIBIL score is below 750, you can increase your chances of loan approval by adding a guarantor to your loan application.  

Also Read: Tips to Maintain Your Business CIBIL Score Above 700 

Who Is A Loan Guarantor And What Is Their Role?

When it comes to loans, the term ‘guarantor’ refers to an individual who takes responsibility for loan repayment in case the primary borrower defaults on the loan. Since the guarantor is legally responsible for clearing the primary borrower’s debt in case of loan default, they must have an excellent financial standing and credit score. If the primary borrower defaults on the loan and the guarantor are unable to cover for them, lenders have the right to seize the guarantor’s property or assets and sell them for loan recovery. It is, thus, that people are advised to analyse all the pros and cons before taking on the responsibility of becoming someone’s loan guarantor.   

What Are The Risks Involved In Becoming A Loan Guarantor?

Becoming a loan guarantor is a huge responsibility. Loan guarantors are as responsible for the loan as the primary borrower. Therefore, loan guarantors must take on the responsibility after understanding all the risks involved.  

The biggest risk involved in becoming a loan guarantor is that if the borrower defaults on the loan, the responsibility for loan repayment comes directly on the guarantor. In this case, the lender will ask the guarantor to pay all missed EMIs along with the penalties and other charges. Thus, people planning to become loan guarantors must make sure the primary borrower is buying loan protection insurance plans.  

If the primary borrower defaults on loan repayment, the responsibility of loan repayment falls on the loan guarantor and if the loan guarantor fails to fulfil this responsibility, their credit score takes a huge hit, which in turn, makes it impossible for them to avail of a loan in future. So, if you plan to avail of a loan of any kind such as a housing loan, in near future, think twice before becoming a loan guarantor.  

In conclusion, there is a lot of risk involved in becoming a loan guarantor. Therefore, borrowers must become loan guarantors only when they have known the borrower for years and are entirely confident of their repayment capacity and financial standing.    

How Does Being a Loan Guarantor Affect Your Credit Score?

The loan guarantor is responsible for loan repayment only if the primary borrower defaults on loan repayment. If the primary borrower pays all loan-related EMIs on time, the credit score of the loan guarantor does not get affected at all. However, if the primary borrower fails to pay loan EMIs on time, the loan guarantor is legally responsible for repaying the missed EMIs. In case of loan default, if the guarantor pays all pending EMIs as well as the penalties applicable, their credit score won’t take a hit.  

However, if the guarantor fails to pay the missed EMIs, the guarantor’s CIBIL score will go down. Further, the lender may also take legal action against them. In case of a full loan default, the guarantor is responsible for repaying the entire loan amount and inability to do so not only damages the guarantor’s credit score and their ability to avail of a loan in future but the lender can also seize their assets for loan recovery or take legal action against them.  

Is it Possible to Remove a Guarantor from a Loan?

Can a loan guarantor get their name removed from the loan? Technically, the answer is yes. However, it is quite unlikely that you will able to remove yourself as a loan guarantor. The decision to remove a loan guarantor or acquiesce one of the duties that come with being a guarantor falls entirely on the lender. If you do not want to be a loan guarantor anymore, you can write to your lender and request them to remove you. However, due to the increasing cases of loan default, it is highly unlikely that the lender will release you of your duties.  

However, there are a few cases in which a loan guarantor can get relieved. First, if the borrower has availed of an additional loan without your consent, you are no longer legally responsible for covering your duties as a loan guarantor. Second, if you can provide the lender with another loan guarantor to replace you, they may be willing to acquiesce you of your duties.  

Final Words

Becoming a loan guarantor is a huge responsibility that comes with many risks. Therefore, if you have been approached to become a guarantor on someone’s loan, inform yourself of the risks involved as well as the pros and cons before taking a final decision. Make sure to perform an online CIBIL score check on the primary borrower and if their CIBIL score is not excellent, refrain from taking on the responsibility.  

Also Read: How to Check, Calculate, and Improve CIBIL Score?