Be Careful, A Loan Guarantee Can Sometimes Be Harmful
We all know that we are personally responsible for our own debts and credit score. But did you know that it is not the only way that your credit score gets affected? When a loan is guaranteed by you, it means that the burden, on defaulting a loan by the borrower, will lie on the guarantor. In this case, you. So if the borrow falls behind on repayment it not only becomes your debt, but such unimaginable debts also affect your CIBIL score.
Why a loan guarantee is required?
The following can be the situations where the need arises to guarantee a loan-
- Usually, a loan is asked to be guaranteed by the borrower when he has a poor CIBIL score. Because his creditworthiness is not reliable enough for banks or lending institutions, an individual with a decent CIBIL score is asked to become his guarantor. Many times a friend or family member will offer to be the guarantor, but this puts much risk on you. You have to be sure the borrower is responsible.
- Sometimes the value of security is not enough to cover the loan; loan will then require a guarantor to pass the loan.
- Guarantors are very much required when loan is an educational loan, there a non-earning individual requires a guarantor in any situation to finance the university fee.
Guaranteeing a loan-
Guaranteeing a loan is not an easy going thing to pass by. You should be aware and informed enough about the creditworthiness and credit performances of the individual you are giving guarantee for. Sometimes, when a friend, acquaintance or relative comes up for a favour of guaranteeing a loan, we usually don’t keep room for such thoughts to erupt. Because relations don’t expect them. But when from your personal credit history perspective, it might not seem to affect you in the short run but will surely block your way to some asset building in future.
Effect of guarantee on CIBIL score-
A loan guarantee may will affect your CIBIL score which you might not have thought of while guaranteeing a loan. Suppose if you guarantee a loan of your friend who need money to finance his education and asks you to guarantee it. And, in future if he loses his job, defaults to repay, it would hence mean your liability has not worked out ethically.
Meaning, you have defaulted a loan that you guaranteed and hence your credit score will shoot down. This sort of devaluations in credit score are not known and not informed to a guarantor by CIBIL up to 4 times the borrower defaults on paying back. Then only a legal notice is sent to both borrower and guarantor, which then offers least leniency in offering time relaxation.
So, all the loans you take and guarantee are clearly mentioned in your CIBIL report. The instalments and the amounts you failed to pay will be mentioned in both, guarantors and the borrower’s CIBIL report.
Keep a note that each financial decision you take or favour you do will have its repercussion effects in the long run. So it is always better to be informed of your liabilities and not to be carried away by irresponsibility in affection.