how becoming a loan guarantor can affect your credit score

How Becoming A Loan Guarantor Can Affect Your Credit Score?

April 15, 2024 • 552 views

A guarantor is an individual who guarantees to repay the debt if the borrower defaults. Lenders usually ask for a guarantor when the borrower does not have a good credit score or lacks the repayment capacity. However, before being a guarantor, you must know that if the borrower fails to repay the loan, it can affect your credit score. Here’s how being a guarantor affects your credit score. Read on!

How Does Being A Loan Guarantor Affect Your Credit Score?

The following points highlight how being a guarantor can affect your credit score:

1. Legal and Financial Responsibility

A loan guarantor shares a legal responsibility to pay the loan back in case the borrower fails to pay. Financial Institutions usually ask for a guarantor if the borrower has a low credit score or doesn't meet other requirements.

A borrower who has a low credit score has a high chance that he or she might not be able to repay the loan. Therefore, in case the borrower defaults, it becomes the guarantor's responsibility to repay the loan. If a guarantor fails to repay the outstanding obligation, it affects the guarantor's credit score.

2. Loan Capacity

Acting as a guarantor for a loan can also decrease your loan-taking capacity. This happens because if the borrower defaults, you are responsible for repaying the loan. Being a guarantor is reflected on your credit report, which can lower your credit score, ultimately reducing your loan-taking capacity.

3. Financial Obligations

You might already have your loan or other financial responsibilities. If the borrower defaults on the loan, you'll have to take responsibility as a guarantor. This can put extra pressure on your finances and might make you default on your financial responsibilities. It could also raise your interest rates and reduce your credit score.

Also Read - How CIBIL Score is Calculated | A Step-by-Step Guide

What Are the Risks Involved in Becoming a Loan Guarantor?

Here are the risk factors associated with becoming a loan guarantor:

1. Affects Your Loan Eligibility: If a default is reflected on your credit report, it will affect your loan eligibility.

2. Can Face Legal Action: A guarantor might be subject to legal action if he or she refuses to pay or comply with the lending institution.

3. Difficulties in Exiting the Contract: It can be a bit difficult to exit as a guarantor until the borrower finds someone else to be a guarantor or offer something valuable as collateral.

Also Read - 7 Useful Tips to Maintain Good CIBIL Score in India

To Conclude

Being a guarantor comes with a huge responsibility and risk. It involves financial and legal responsibility, may affect your loan-taking capacity, and may have obligations. Therefore, before committing to become a guarantor, it's crucial to understand the potential risks and implications associated with it.

Disclaimer

We take utmost care to provide information based on internal data and reliable sources. However, this article and associated web pages provide generic information for reference purposes only. Readers must make an informed decision by reviewing the products offered and the terms and conditions. Loan disbursal is at the sole discretion of Poonawalla Fincorp.
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poonawalla fincorp team

Poonawalla Fincorp Team

Our team of expert writers and editors are passionate about providing authentic and valuable information on finance. Our aim is to simplify financial and finance-related concepts. We strive to help our readers become more aware and empowered to make informed financial decisions.

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