When you become guarantor for someone else's loan, you're not just providing moral support—you're promising to pay back the loan in the event of default by the borrower. This risk is priced by credit rating agencies like CIBIL, and can impact your credit rating, your ability to get loans in the future to you, and even overall your financial health.
Defaults from the borrower can destroy your credit rating
If the EMIs or the loan is defaulted by the initial borrower, then the lender will request the guarantor to settle. The default can even be reported against your name and thereby lower your CIBIL score. Although you were not directly liable for the default payments, your credit record is adversely affected due to the legal obligation as the co-signor. Your own access to credit can get curtailed at times.
Credit usage and eligibility can be affected
The secured loan then becomes your contingent liability, and hence a component of your overall credit exposure. Lenders and banks would consider this when sanctioning your loan requests. Your eligibility, therefore, would be truncated if you needed to take a personal loan, car loan, or even home loan in the future because of this previous commitment even though it has not been repaid. Your credit utilization ratio would also increase, affecting your creditworthiness.
Your debt ratio might be greater
Even though you aren't paying the guaranteed loan, your lender counts your responsibility against your debt-to-income (DTI) ratio. High DTI may be a signal to lenders that you are riskier and result in loan denial or inordinate interest if you do borrow. It's a covert penalty most guarantors don't consider until it happens.
It's difficult to have your name removed as a guarantor
Most individuals believe that they can withdraw as guarantor at a later stage. But your commitment is not gone until the loan is paid in full or refinanced without your guarantee. Even if the borrower's personal relationship with you fails, you are bound under contract. It takes the borrower and lender's agreement to remove your name—both factors which are not easy to do.
FAQs
Q1: Do you always impact your CIBIL score by acting as a guarantor?
No, not at first. If the borrower pays in time, then your score will not be impacted. If he delays or defaults, it will adversely impact your credit score because the account is linked to you.
Q2: Can I remove myself as a guarantor mid-term, before the conclusion of the loan?
Only if you repay the loan or if your lender waives you off, but that is unlikely. Otherwise, the liability continues until it is completely paid.
Q3: Do I need to verify my CIBIL report if I am a guarantor?
Yes. It is best to keep checking your report from time to time so that you are aware of any defaults or delayed payments that impact your credit score.
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