Being A Loan Guarantor Can Affect Your CIBIL Score

When a lender advances money to a borrower it assesses the person’s repaying capacity and the inclination to repay the debt along with all dues. The issue is partly solved in the case of secured loans but for unsecured debts a lender has to take a risk without knowing for sure if the borrower will meet his or her liability.

In the case of a secured loan, the value of collateral is typically much more to ensure the lender that the money lent is well covered for. This is not the case with unsecured loans where a borrower’s credit history and the CIBIL score come into play.

The score, which captures creditworthiness, lies between 300 and 900. The higher the number, the better. That said, even if one has a high score there could be cases where a lender may insist on bringing in a loan guarantor.

Loan Guarantor

A guarantor is a person who vouches for the repaying capacity of the borrower. In simple terms, a loan guarantor acts as an insurance element for a lender. The guarantor is not required to pay equated monthly instalments (EMIs). The guarantor basically agrees to be responsible for the loan applicant’s payment of debt if he or she defaults. So, even if the guarantor is not a co-borrower or co-applicant, a person agreeing to become a guarantor is equally responsible for paying off the loan.

The guarantor is required in some specific instances:

• Eligibility:

At times, the monthly income of the person applying for a loan may fall short of the threshold of the lender, either in terms of the amount to be borrowed or the creditworthiness. A loan guarantor acts as a comfort factor for the lender that in the event of a default there is another person who can be called upon to cover up and pay back the money owed.

• Special Cases:

A lender may also make a loan guarantor mandatory in certain cases. For instance, an NRI applying for a loan in the country may be required to bring a local resident as a loan guarantor.

A critical aspect that one needs to know is that as a loan guarantor one’s own creditworthiness is on the line. If the primary borrower defaults, the guarantor has to pay up. Even though the default by someone else itself does not affect the CIBIL score of a guarantor, since he or she has agreed to become a guarantor, the outstanding loan of somebody else gets counted in the credit report of the guarantor and affects the credit score.

Conclusion

A person can help out a family member or friend by pitching in as a loan guarantor to allow the other person to avail a particular size of loan which may not otherwise get sanctioned given the income profile. Even though the guarantor himself or herself is not expected to contribute to EMIs, the loan does become a liability of the guarantor in the case of a default by the original borrower. This affects the CIBIL score of a guarantor even if there is no default as it becomes part of outstanding debt that the person has agreed to pay.