If the Borrower defaults on the account, it will have a negative effect on your CIBIL credit score.
When you sign a Guarantee, you are agreeing to be responsible for paying the debt in the event of a default. Therefore, it will show up on your credit report just like any other account for which you are liable. If the Borrower defaults on the account, it will have a negative effect on your CIBIL credit score.
Vikrant Suri, 32, was a well paid executive. When a friend asked him to guarantee a home loan for him, he did not hesitate. After all this was an old trusted friend and he had a decent job and would surely pay his EMIs. Unfortunately, Vikrant’s friend got into some bad times and defaulted on his loan. The bank reposed the house to recover the loan. Though Vikrant luckily escaped the financial liability of being a guarantor, it affected his credit rating.
Many people agree to become loan guarantors believing that their responsibility is limited to ensuring that the debtor pays his EMIs on time. However, a guarantor is not only bound to pay the loan amount if the debtor defaults, but the transaction could impact his credit score and loan eligibility too.You become a Guarantor when you sign a written and legally binding agreement, which is called a Guarantee. When you sign a Guarantee, you agree to be responsible for the payment of another person’s debt, if the Borrower defaults on repaying the debt.
Information on the default of such payments appears in the "Accounts" section of the guarantor's CIBIL Credit Information Report (CIR). It reduces his overall credit taking ability. If the guarantor himself is planning to take a large loan, it may make sense not to guarantee a loan of friend/ relative.
How does being a guarantee affect your credit score?
As a guarantor of the loan, you are responsible to ensure the payment of the loan. A guarantor basically pledges to repay a loan who has taken the loan. In essence he guarantees that he will repay the loan in case the principal applicant is unable to do so.Infact when you sign on as a guarantor the bank would access your credit report too for verification.
- Becoming a loan guarantor would reduce your loan-taking capability. If someone is a guarantor on a loan, his own loan eligibility comes down than what it would have been if he wasn’t a guarantor.Also, if the borrower defaults on the loan, it will reflect on the guarantor’s credit report. Though a guarantor is responsible for a loan, usually on a secured loan, like a home loan, the bank will try to sell off the security to recover the loan amount.
- The borrower’s as well as your credit reports will mention that you are a guarantor. A guarantor’s report will state so. In fact, for any valid application, the bank can access the guarantor’s credit report. If you have no credit history that this can help you create a credit history.
By signing a guarantee you are putting your credit reputation at stake, so do not do sign until you are very sure about the repayment abilities of the borrower.
The author is Co-Founder & Director, CreditVidya
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