How Does Being A Loan Guarantor Affect Your Credit Score?

While becoming a loan guarantor may seem like a simple favour, it is a huge financial responsibility that can impact your credit health. Being a loan guarantor can affect your credit score if the borrower delays EMIs or defaults on the loan. This is because their missed payments get linked to your credit record. Let's understand in more detail how your credit score will be affected by serving as a loan guarantor.

What is a Loan Guarantor?

A loan guarantor is a person who agrees to take responsibility for a loan if the primary borrower fails to repay it. Being a guarantor means more than just signing the agreement; it includes legal and financial obligations when the borrower defaults on a loan. 

When you sign as a guarantor, the loan appears on your credit report as a guaranteed loan. It connects your credit profile to the borrower’s repayment behaviour. If the borrower defaults or fails to make timely payments, it could immediately affect your credit score by damaging your payment history.

Also Read: Essential Credit Score Monitoring Tips for Better Financial Health

Factors Affecting Credit Score and Financial Profile as a Loan Guarantor

As a loan guarantor, your credit profile responds to how the borrower manages the loan:

1. Shared Responsibility for Repayment

By guaranteeing a loan obligation, you're trusting the borrower's ability to repay. If the borrower defaults, the lender has the right to ask you to repay the loan. Any missed or late payments, including those related to high credit card balances, will affect your credit scores. 

2. Increased Credit Exposure

The aggregate loan amount you are guaranteeing will be an addition to your credit exposure. The credit bureaus will count that amount as an additional financial commitment, along with other credit commitments you have. 

A higher guaranteed loan amount does not directly lower your credit score; however, it increases your overall credit liability. Your score can be affected if the borrower delays or defaults on the loan.

3. Impact on Loan Eligibility

If you intend to apply for any loans (i.e., Personal Loan, Home Loan, or Business Loan), being a loan guarantor may affect your loan eligibility. Because your name is tied to the other loan, the lender may reduce the credit limit or the loan amount.

4. Legal and Emotional Implications

If the borrower does not follow the repayment schedule, lenders may take legal action against both the borrower and the guarantor. It may also harm your relationship with the borrower, so you need to be mindful of whom you are supporting financially.

Managing Your Credit Health as a Loan Guarantor

Maintain a strong credit profile while fulfilling your loan guarantor responsibilities, with the help of these steps:

1. Monitoring Credit Report Errors

Review your credit report  soon after becoming a guarantor to ensure the loan is reported correctly. If it shows the loan as defaulting or delayed incorrectly, raise a dispute immediately, as this can harm your credit score. 

2. Responsible Credit Usage

Even though you are a guarantor, your personal creditworthiness still matters. Your credit usage affects your credit utilisation ratio, so you should try to keep it below 30%. 

You can do so by paying your credit card bills on time and avoiding carrying balances close to your available credit limit. Also, avoid applying for new credit around the same time you apply for the targeted loan. 

3. Maintaining a Balanced Credit Mix

In addition to managing your credit card responsibly, managing your term and secured loans responsibly also shows financial stability. A good credit mix shows that you can handle different types of credit products effectively.

Also Read: How to Get a 900 Credit Score – Tips to Improve CIBIL

Tips to Protect Your Credit Score as a Loan Guarantor

Follow these useful tips to make a good credit score as a loan guarantor:

• Only act as a guarantor for someone you trust to be financially responsible.
• Periodically monitor the borrower’s repayment habits.
• Keep your credit utilisation low and pay all your bills on time.
• Check your credit score and credit report with all major credit bureaus every few months.
• Avoid co-signing more than one loan at a time.

To Conclude

Serving as a loan guarantor is a serious financial responsibility. You may help a borrower secure a loan; however, being a guarantor can affect your credit score and overall financial health.

Before you agree, assess the borrower’s repayment ability and understand all the loan terms, especially when the loan amount is high. Also, stay updated on the loan’s progress. With careful judgment and good credit habits, you can protect your credit profile while still helping someone.

Check your CIBIL score instantly for free with Poonawalla Fincorp and take charge of your financial freedom. 

FAQs

What is the role of a loan guarantor?

A loan guarantor is a person who agrees to pay the borrower’s debt if the borrower fails to make timely repayments.

Does a guarantor loan show up on my credit report?

Yes. The loan will appear on your credit report and can affect your credit score and overall credit exposure.

How can I check whether being a guarantor has affected my credit score?

You can check whether being a guarantor has affected your credit score by regularly reviewing your credit report from reputable credit bureaus.

Can being a guarantor lower my credit score?

Yes, if the borrower defaults or pays late, your credit score can suffer, which can affect the interest rate on future loans. 

What should I do before I agree to be a guarantor?

Before agreeing to be a guarantor, review the borrower’s credit history, income stability, and repayment behaviour. Make sure you fully understand the loan terms and assess whether you could handle the debt if the borrower defaults.