Can Being a Guarantor Affect Your CIBIL Score: A Detailed Explanation

There can be instances in life when you’ll be asked to become a loan guarantor. It can be for a friend, family member or any other person you know. This may feel like a small thing to do, where you are simply helping someone who is in need. However, not many people understand that it also places a financial obligation on them, even if they are not the ones to receive the funds.

Many people who find themselves in such a situation often wonder things like –

• What does it mean to be a loan guarantor?
• Does a loan guarantor need a good credit score?
• Impact on Your Credit Profile
• Tips to Follow While Becoming a Guarantor
• Final Thoughts

Here is a detailed explanation of all these things that will help you develop a clear understanding:

What does it mean to be a loan guarantor?

A loan guarantor is a person who legally agrees to take the responsibility of a borrower’s debt. It gives the lender a sense of assurance that the loan will be repaid, even if the borrower fails to do so. This arrangement is needed when the primary borrower doesn’t meet the basic eligibility requirements for a loan. The reason could be anything, such as poor or no credit history, high loan amount, no steady source of income, etc. Once an individual agrees to act as a loan guarantor, he/she is legally bound to that loan agreement.

In simple words, a loan guarantor acts as a safety net for the lender. If the person who has borrowed the money is unable to repay, the lending institution will expect the guarantor to make the payment.

Does a loan guarantor need a good credit score?

A CIBIL score, or credit score, is a 3-digit number that reflects an individual’s creditworthiness. It is calculated by taking your borrowing and repayment history into consideration. When an applicant has a low credit score, the lending institution often requires a guarantor who can take responsibility for the debt. Since the guarantor is required to ensure that the loan will be repaid if the primary borrower defaults, he/she must have a good to excellent credit score.

Impact on Your Credit Profile

Being a loan guarantor can affect your credit profile in various ways, such as:

The Loan Appears on Your Credit Report

Once you become a guarantor, the loan is added to your credit record as a contingent liability. This shows that you are indirectly responsible for that loan.

Your Loan Eligibility Gets Affected

When you apply for a loan, credit card or any other kind of debt, your eligibility is determined by evaluating your existing liabilities. When you become a guarantor, that loan is considered a part of your financial obligations, directly affecting your creditworthiness. This can either make you ineligible for bigger loans or lead to a higher rate of interest.

Late Payments Hurt Your Credit Score

When you obtain a loan, every delayed payment has a negative impact on your credit score. This thing remains the same in this case as well. If the primary borrower is not able to make payments on time, it can reduce your credit score.

Defaults Can Be More Problematic

The biggest risk involved in becoming a guarantor is associated with payment defaults. If the borrower is unable to repay the loan and defaults, the complete responsibility of that debt comes to you. This not only leads to a sharp drop in your credit score, but you may also have to face some legal action if the outstanding amount isn’t paid on time.

Tips to Follow While Becoming a Guarantor

• Always assess the borrower’s repayment capacity and financial discipline before you agree.
• Read the loan agreement carefully and understand the borrowing terms.
• Ask for regular updates on loan repayment.
• Keep yourself financially prepared for cases where you’ll be required to step in.

Suggested Read: Online Personal Loan vs. Offline Personal Loan - Which Is Better for You?

Final Thoughts

A guarantor plays a crucial role in the personal loan process. When the primary applicant doesn’t meet the eligibility requirements, a guarantor provides an extra layer of security to the lender. By becoming a guarantor, you take the full responsibility of a debt and will be expected to pay the outstanding loan amount in case of a default. This is one of those decisions that may seem very small, but it has a significant impact on your financial profile. It is important to make this decision by carefully considering every aspect and, most importantly, the consequences.

At Muthoot Finance, we offer quick and hassle-free personal loans at highly competitive interest rates. All these loans come with flexible eligibility criteria and typically do not require a guarantor. For more information, you can either reach out to us online or visit the nearest Muthoot Finance branch.