When people think about being a loan guarantor, they often focus on their urgent need for help and support. The long-term effects that such an act may have on one’s credit score are still unknown, though. By including a guarantor on your loan application, you can improve your chances of getting approved for a loan if your CIBIL score is below 750.
In this blog post, we will share some shocking realities behind being a loan guarantor and make you aware before being a loan guarantor of any known person.
Loan Guarantor’s Role
A loan guarantor is a person who agrees to pay back a loan on the borrower’s behalf if they miss payments. By guaranteeing that the loan will be returned even if the primary borrower cannot complete their responsibilities, this act acts as a safety net for lenders. You are required to sign a legally enforceable contract as a guarantor, promising that the borrower will pay back the loan within the allotted time. The agreement also specifies that you would be responsible for repayment of the debt on behalf of the borrower, including interest and any associated penalties, and that you would be held liable under Section 128 of the Indian Contract Act.
How does being a Loan Guarantor impact your CIBIL Score?
The CIBIL score of the borrower is one factor that determines their eligibility for a loan. The CIBIL score, also known as the credit score, is a three-digit figure that ranges from 300 to 900 and represents a borrower’s ability to repay debt.
The loan guarantor’s CIBIL score is unaffected in any way if the principal borrower makes all of the loan’s installment payments on schedule. On the other hand, if the principal borrower defaults on the loan, the loan guarantor is legally obligated to make up the missed EMI payments or any related penalties. If the loan guarantor pays all the dues, their CIBIL score won’t be affected, On the other hand, the guarantor’s CIBIL score would decrease if they neglect to pay the overdue EMIs.
If there is a complete loan default, the guarantor is accountable for paying back the entire loan amount. If they are unable to do so, the lender may take legal action against them or seize their assets to recover the debt, harming their credit score and future loan eligibility.
Strategies to Reduce Risks: Tips for Loan Guarantors
Even though taking on the role of a loan guarantor may sound difficult, there are proactive steps you can take to reduce any risks and protect your credit score:
- Evaluate the Situation in Detail
Make sure you fully understand the borrower’s financial status and loan repayment capacity before agreeing to be a guarantee. Make sure you can afford to take on any risks involved.
- Create Clearly Defined Channels of Communication
Keep the lines of communication open with the borrower throughout the whole term of the loan. Make sure they’re handling their money sensibly and paying on time by checking in with them regularly.
- Keep an eye on your credit report
Keep a close eye on your credit report so you can be aware of any changes or discrepancies. As soon as possible, take care of any problems to reduce their effect on your credit score.
- Backup Plan
Have a backup plan in place in case the borrower decides not to repay the debt. Think about how you would manage the loan repayment if such a circumstance developed.
Also Read:Â 7 Causes for a Decline in Your Credit Score
Upshot
Even while acting as a loan guarantor for a friend or relative in need might be a kind gesture, it’s important to move cautiously and thoroughly grasp the potential repercussions. You can manage the duties of being a guarantor while preserving your financial security if you keep yourself informed, keep lines of communication open, and take proactive measures to preserve your credit. If the principal borrower’s CIBIL score is below exceptional, make sure to check their score online and decline to assume responsibility.
Disclaimer:Â The information provided in this blog post is intended for general informational purposes only. It is not meant to serve as financial advice or guidance. Individuals need to conduct thorough research and seek professional advice before making any financial decisions related to becoming a loan guarantor.
