08 July 2024 | By INDIE
To become a loan guarantor is to take up a significant financial responsibility that can have profound implications on your credit score. Understand the risks and impacts associated with this role before you make a commitment.
A loan guarantor is an individual who agrees to take on the financial responsibility of repaying a loan if the primary borrower defaults. This agreement is legally binding and typically involves co-signing the loan documents. The guarantor provides an added layer of security to the lender, which makes it easier for the primary borrower to secure the loan, often at better terms or with a lower interest rate.
The fundamental responsibilities of a guarantor include:
Repayment Obligation: If the primary borrower fails to make repayments, the guarantor must cover the missed payments.
Credit Impact: The loan appears on both the borrower’s and the guarantor’s credit reports.
Legal Consequences: In case of default, the guarantor can face legal action from the lender to recover the debt.
Here are a few ways how your credit score can get affected once you become a loan guarantor.
Credit Report Inclusion: Taking responsibility as a loan guarantor means having the loan listed on your credit report. This means that the loan amount and repayment status are visible to other lenders and can impact your creditworthiness.
Debt-to-Income Ratio: Being a guarantor increases your total outstanding debt, which can affect your debt-to-income ratio. Lenders use this ratio to assess your ability to manage additional debt, and a higher ratio can make it harder to obtain credit for yourself.
Payment History: Your credit score is significantly influenced by payment history. If the primary borrower misses payments, those failures will reflect on your credit report as well, which will potentially lower your score.
Credit Utilisation: The additional loan can impact your credit utilisation rate, a factor in credit scoring models. High utilisation can negatively affect your credit score.
Also Read: How to Get Approved for a Line of Credit
As a loan guarantor, it is essential that you keep a lookout for the below risks:
Defaulting: If the primary borrower defaults, the guarantor is liable for the debt, which can lead to financial strain and damage to your credit score.
Impact on Loan Eligibility: Your ability to secure loans for yourself can be compromised due to the increased debt reflected on your credit report.
Stress and Relationship Strain: The financial obligation can lead to stress and potential strain on your relationship with the primary borrower if they fail to repay the loan.
To manage the responsibilities effectively:
Assess Borrower Reliability: Ensure that the primary borrower has a stable income and a good track record when it comes to the management of debts.
Monitor Payments: Keep track of the loan repayments to ensure they are made on time.
Understand Legal Implications: Be fully aware of the legal responsibilities and consequences involved in being a guarantor.
The presence of a guarantor provides the lender with an additional sense of security. Guarantor personal loans are loans where the borrower uses a guarantor to enhance their creditworthiness. These loans are often used by individuals with poor or limited credit histories who might not qualify for loans on their own.
When you understand the implications and responsibilities of being a loan guarantor, you can make informed decisions that protect your financial health and credit score. Always consider the risks and manage your role proactively to mitigate potential negative impacts.
A credit line by INDIE is a flexible loan arrangement that allows the borrower to draw funds up to a pre-approved limit. The borrower pays interest only on the amount used. For those considering taking on financial responsibilities such as being a guarantor, avail a personal credit line for a safety net in case of unexpected financial obligations.
Disclaimer: The information provided in this article is generic and for informational purposes only. It is not a substitute for specific advice in your circumstances. Hence, you are advised to consult your financial advisor before making any financial decision. IndusInd Bank Limited (IBL) does not influence the views of the author in any way. IBL and the author shall not be responsible for any direct/indirect loss or liability incurred by the reader for making any financial decisions based on the contents and information.
