Those of you who are well settled in life, earning reasonably well and have a decent savings goal may be thinking that you are doing all things right to improve CIBIL score. Therefore, when someone close to you approaches you to become a guarantor for a loan that he or she wants, you think you are doing a good deed and do not bat an eyelid before you sign up as a guarantor. But did you know that by signing up as a guarantor you are putting your own financial future in jeopardy, and if something goes wrong your CIBIL score may take a tumble? Confused as to how that can happen? Read on to find out more.
Although the banking sector in India is a well-regulated and robust and standardized sector, and there are enough checks and balances in place for consumers who wish to take anything from an online credit card to a low interest home loan, the nomination of guarantors remains somewhat of a grey area. Individual banks have their own set of rules in place when it comes to guarantors. Banks usually ask the borrower to step in with a guarantor if he is borrowing a sum of money that is upwards of Rs 5 lakhs and also depends on the CIBIL score and CIBIL report of the borrower. It can be any type of loan that a guarantor may be asked for by the lender.
Who is a guarantor?
Often times people close friends or relatives, may approach you to step in as a guarantor when he is making an application for an education loan or taking on a low interest home loan. You think that he is asking a favour of you and in a stroke of magnanimity you tell yourself that just signing a few papers will not do you any harm or it does not have any major implications. What you perhaps are not aware of, is that by agreeing to become a guarantor you are choosing to become fully accountable for the loan he is taking on. This means that if he is unable to repay his loan for some reason, you need to shoulder his debt burden. Also, if the borrower does not make repayments and absconds without telling the bank, the bank has the full right to make you repay the full amount on his behalf.
This is not where it ends. By agreeing to step in as a guarantor for someone else’s loan your own loan eligibility gets reduced. Thus if you apply for anything like an easy personal loan to any type of home loans, your loan eligibility will be reduced to the extent that you have stood in to guarantee. There is therefore a good chance that you are putting your financial future in jeopardy by stepping in as someone else’s guarantor.
Impact on your credit history
The moment you agree to become a loan guarantor, the bank passes on the information to the credit bureaus in the nation. Till such time as the loan you have guaranteed gets repaid, your credit report continues to reflect the fact that you are a loan guarantor. While just a mention in your CIBIL report does not impact your CIBIL score per se, any repayment delay or default will bring your score crashing down.
What’s the way out?
First things first, avoid stepping in as a guarantor for a loan unless its spouse or child and you are in the know and in control of his or her financial wherewithal. If it is a dear friend or relative you dearly love, be completely sure of his financial condition and his capability to repay to avoid any rude shocks later. Secondly check the sanctity of the credit line that you are guaranteeing.
For example, if it’s an higher education loan that you are guaranteeing, make sure you know the credentials of the school and if the person in question will have good career prospects after having completed his education. Even if there is the slightest doubt about any of the above, go ahead and say a firm no. You may lose out on a friend or invite the wrath of kin for doing so, but that is decidedly better than putting your own future and your hard earned money in jeopardy.