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Who is a loan guarantor?

When an applicant of a loan – home loan, personal loan or any type of loan, has a poor track record of debt repayments, there are slender chances of him/her being offered credit. However, some banks and financial institutions offer loans to applicants with a negative credit history on condition that the applicant has a loan guarantor. A guarantor has to be one with a good CIBIL score, offering the concerned bank or financial institution the assurance of retrieving the pre-determined payments within the pre-decided due date. Even if the applicant defaults on loan repayments, the guarantor can financially assist the borrower in making the loan payments on time. Unsecured loans like educational loan and personal loans record the most instances where borrowers are asked for a guarantor.

Applicants usually sign up for loan offers where banks and financial institutions ask for a loan guarantor without understanding the terms and conditions that accompany it. The same can be said for guarantors as well. They are usually friends, relatives and acquaintances of borrowers and sign up as guarantors in good faith. However, they are often unaware of the meaning of becoming a guarantor for a borrower with a poor credit history.

Legally, a guarantor is a co-applicant without the benefits of a beneficiary. Therefore, when the applicant defaults, it not only adversely affects his/her CIBIL score, but the guarantor’s too, without any fault of his/her own. If the applicant is unable to pay for the loan for a considerable period of time, the concerned bank or financial institution might ask the guarantor to pay the outstanding dues on the applicant’s behalf. Under such circumstances, not only is the borrower viewed as a debtor, but the guarantor also becomes a defaulter of the loan.

When an individual becomes a guarantor, a separate CIBIL account gets created and information regarding debt repayments made by the applicant appears in the guarantor’s CIBIL report as well. This information will be accessible to the future prospective lenders of the guarantor, hampering his/her scope of loan and credit card eligibility. Further, if the borrower dies, it will be the responsibility of the guarantor to repay the balance debt amount of the loan. After being seen as a defaulter, the guarantor has to take as much effort to improve his/her CIBIL score as the primary borrower.

Points to consider before becoming a guarantor

  • Check the borrower’s credit history : Before becoming a guarantor, ask why the loan applicant wants to borrow and the reason behind him/her requiring a guarantor. Thoroughly check his/her CIBIL score and report. Also, read through the loan document to become aware of the EMIs consisting of the interest and principal amount payable and other terms and conditions. This will enable you to analyze whether you have the financial capacity to repay the outstanding dues pending against the borrower’s name, in case he/she has defaulted.
  • Impact on your CIBIL report : As mentioned earlier, defaults on premium payments made by the primary borrower also gets reflected in the newly-opened credit account that becomes visible in the guarantor’s CIBIL report. This affects the debt to income ratio of the guarantor, minimizing his/her creditworthiness. The more time it takes for the primary borrower and guarantor to fix the defaults, the more detrimental will be the effect on both their CIBIL scores and reports. Their scores reduce with every default and get reflected in their credit history for the next three years.
  • Be sure of what you are getting into : The objective of banks and financial institutions to evaluate the prospects of recovering the loan amount is to safeguard its interests and ensure its financial stability. An individual, before signing up as a guarantor, should do the same before becoming one. Poor credit history is one of the primary factors behind a loan applicant being asked for a guarantor.
    There are other factors too that play an important role in deciding on the loan eligibility of an applicant. Some of these reasons are discrepancies in personal information provided in the loan application form, frequent job changes, etc. In case the primary borrower’s loan application is rejected due to such reasons, there is no doubt that his/her CIBIL score will be affected. However, along with that, it will also have a detrimental effect on the guarantor’s CIBIL score as well.
  • Avoid being a guarantor to borrowers with poor credit history : It is best to avoid becoming a guarantor for a borrower who has a poor credit health. One who has a history of poor debt repayment has a huge chance of continuing the same habit in the future as well. This should raise a red flag for you against becoming a guarantor for such borrowers. It is a sure shot way of reducing your CIBIL score, despite you being careful with debt repayments on your own credit applications.
    Be sure about the terms for un-guaranteeing a loan

Some banks and financial institutions offer guarantors the provision of un-guaranteeing a loan. At other times, lenders offer guarantors the benefit of passing on the responsibilities of a guarantor to another individual as a replacement. However, the chances of getting a substitute guarantor are usually slender. Not all lenders offer this benefit. Read the loan document carefully to know the features and benefits the lender offers to loan guarantors. Once you officially become a guarantor, you would not be able to avoid the terms and conditions that you have signed up for.

Conclusion

Taking a decision on whether becoming a loan guarantor would not affect your CIBIL score and report may not be an easy one. Apart from accurately analyzing the scope for negative consequences, it might be a sensitive issue for you to refuse the request for becoming a guarantor. This is because such requests are usually made by friends, family and acquaintances. Becoming a guarantor for small personal loans and short term loans are comparatively less risky. For long term loans, it is recommended that you opt for an additional guarantor to share the debt burden, in case such a situation arises. A payment insurance will also be helpful in the eventuality of the death of the borrower.

FAQs On Can Being A Loan Guarantor Affect Your CIBIL Score?

Can I stop being a loan guarantor?

You can stop being a loan guarantor only if the terms of the loan document offer the guarantor this benefit. This is one of the essential terms that you should check for while becoming a loan guarantor. If the agreement that you have entered into as a loan guarantor does not mention this benefit, there is no way by which you can now stop being a loan guarantor.

Can anyone become a loan guarantor?

Banks and financial institutions generally have their own terms and conditions regarding who they would accept as a loan guarantor. They usually approve of an individual with a steady source of monthly income, assuring them of timeliness of payment of dues, even when the primary borrower defaults. Also, they usually prefer an individual with a higher CIBIL score than the primary borrower, indicating at his/her creditworthiness. Some lenders may emphasize on the primary borrower and the loan guarantor works in the same organization, so that their employer could be contacted in case both of them default.

What are the eligibility criteria for being a loan guarantor?

The usual eligibility criteria that banks and financial institutions usually look for in a suitable loan guarantor are:

  • An individual who is at least 18 years of age
  • Have a stable source of monthly income
  • A consistent record of timely debt repayments
  • Preferably a friend or family with significant influence on the primary borrower to encourage him/her to repay the outstanding dues on time
  • Not becoming a guarantor out of compulsion or by force from the primary borrower
  • Aware of the primary borrower’s outstanding dues against his/her loan and essential details like applicable interest rate, tenure, repercussions on defaulting, etc.
  • Thoroughly aware of the terms and conditions applicable to the primary borrower as well as himself/herself, as per the loan document
  • Should have a copy of the loan document, post approval of the loan
  • Mentally sound

When do lenders ask a loan applicant for a guarantor?

Here are some reasons that may make banks and financial institutions ask for a loan guarantor from a loan applicant:

  • Not convinced of the guarantor’s ability to repay the outstanding dues in case the primary borrower defaults
  • Lack of a reliable and stable source of monthly income or several job changes in the recent past
  • Frequent job transfers to different cities
  • Poor academic record or background, raising questions on income and job stability
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