When you have low credit score, bringing forward a Guarantor’s recommendation enhances your eligibility for loan approval. For, a loan guarantor legally shares the loan risk. However the decision would straight away affect their credit profile.
Thus it is important to consider all the associated financial aspects before becoming a Guarantor for anyone. Becoming a guarantor could be more than a financial obligation and may even put forth one into a legal battle in case of the default made by the main borrower. No one wants to land in the loan defaulter list for no fault of theirs. Be it your spouse, friend or relative, you would make a serious footprint on your credit report by signing the dotted lines ascribing you as a Guarantor. Credit health of borrower Before signing the loan agreement, you must consider why the borrower wants to borrow. It is important to study carefully the credit report of the person who wants to make you Guarantor. After you sign the loan agreement and become a guarantor, you would legally be responsible for the payment of the debts on default. It is important to ensure that the borrower is availing a loan that is manageable and as per their repayment capacity. Impact on your credit report When you become Guarantor for a loan, be it a home loan, personal loan or any other loan, a new credit account is opened in your credit report. Till the time the loan is successfully repaid, the account will be marked in your credit history. This directly hurts your debt to income ratio and indeed reduces your credit worth. The longer is the loan, the longer would remain the effects of loan on your credit report. Being a financially prudent person, you need ensure that the borrower is making timely payment every now and then. For, a single delayed repayment would hurt your credit history. Reconsider your decision Before becoming a guarantor for a friend, be mentally prepared for the brunt you may face in case of nonpayment. Many a times, the borrower needs a Guarantor not because of poor credit rating but for the other external reasons such a job requiring frequent change in places or having a difference in place of applying loan and the permanent address of applicant. The lender basically looks for financial stability before extending a long term loan and you too must judiciously take a decision to extend the hand of help. You must ensure that the person is trustworthy and might not become untraceable in future before the maturity of loan. Know what happens when the main borrower defaults In case of the default, it would certainly be a nightmare for the Guarantor. As per the loan agreement, the lender can visit you for the outstanding payment. In fact your bank accounts and properties could be challenged for loan recovery. In worse case, you may turn bankrupt if the nature of the default is immense. Your credit rating would be blacklisted for a very long time and you might just not be able to draw credit for a very long time in future. Some more things to pay attention to: Beware of signing as a Guarantor for a borrower who need guarantee due to poor repayment history. For, their past credit history already reflects indiscipline in credit payment. They are more likely to lapse the payments in future as well. By guaranteeing such loan accounts you would possess huge risk to your credit history. When you are planning to raise a loan say a home loan or an auto loan, you should avoid sharing the loan responsibility with others. For it would straight away reduce your credit worth. Any misadventure by the borrower may even turn you ineligible for credit you need. It would not be wrong to say that, you should become a Guarantor only when you have enough funds to absorb the financial responsibility of the loan. Finally if you decide to sign the loan agreement, make sure you read the terms and conditions in fine prints properly. There should not be a condition you are not comfortable with.