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A Loan Guarantor, as the name suggests, is an individual who guarantees that he or she will repay any unpaid portion of a loan if the person who is borrowing defaults on repayment.
Why are Guarantors Required?
Banks and Financial Institutions usually ask a person applying for loan to provide a guarantor when the applicant has a low CIBIL Score, has a low or no steady source of income, or a high loan amount and tenure. The meaning of a guarantor in such cases is a person who has sufficient financial security and a high CIBIL score.
As per Section 128 of the Indian Contract Act, 1872, “The liability of the surety is co-extensive with that of the principal debtor”, which means that a guarantor is as responsible as the borrower for the repayment of a loan.
As a prospective guarantor, you need to have a prior relationship with the borrower so that you can influence the lender about your ability to repay his/her liability. Another thing a guarantor must ensure is that he/she should be aware of all the terms and conditions of the loan before signing the application form. This is because the agreement they sign is legally binding on them.
An instant personal loan is usually processed online, and while only the names of the references are required, guarantors need to sign or give their assent – physically or digitally.
Also Read: All You Need to Know Before Applying for a Personal Loan
Can Being a Guarantor Affect Your Credit Score? How?
As stated earlier, being a guarantor carries the same legal implications as the borrower. Thus, it also has an impact on your credit score. Your CIBIL report will show the loans you have chosen to guarantee and the repayment performance of these loans.
Assuming the positive first, if the borrower repays the loan regularly and properly, this regular repayment will reflect positively in your CIBIL report too. This is the best-case scenario.
As a guarantor for a loan, you may be negatively impacted by being in that position in the following ways:
Credit Score May Get Negatively Impacted:
If the borrower is not servicing the loan regularly and properly, your credit score will be negatively impacted. The borrower’s default will decrease your CIBIL score and negatively affect your credit history. This in turn will hurt your capacity to borrow or apply for loans. What is worse is that the lending bank or financial institution will mostly not even inform you of such default and negative impact. You will not even know when your CIBIL score is getting affected.
Lower Loan Eligibility:
The loan in which you are a guarantor is essentially debt taken by someone else. However, when you apply for a loan yourself, such outstanding loan liability may be deducted from your loan eligibility.
Possible Legal Action:
In case the borrower defaults on the loan liabilities and does not pay the EMIs, for whatever reason, the liability for the outstanding loan, principal together with interest and penalties shifts to you. If you refuse to or are not able to pay, you may attract legal action.
Exit Barriers:
It is nearly impossible to exit from the position of guarantor of an existing loan. The borrower needs to arrange for a new, eligible, guarantor or submit collateral securities. However, this too is subject to approvals from the lender, which are not usually forthcoming.
Also Read: Missed a Personal Loan EMI Here’s What to Do Next
Conclusion
You need to be very careful and sure of the intentions and the repayment capacities of the borrower before becoming a guarantor of a loan. The negative impact is far and wide-reaching and may potentially destroy your credit history and CIBIL score for no actual fault of yours.
Disclaimer: The information provided in this article is generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances. Hence, you are advised to consult your financial advisor before making any financial decision. IndusInd Bank Limited (IBL) does not influence the views of the author in any way. IBL and the author shall not be responsible for any direct/indirect loss or liability incurred by the reader for making any financial decisions based on the contents and information.
