Credit score is a numerical measure of an individual’s credit character. It is a critical factor while availing loans and credit cards from banks and financial institutions.
Individuals having a low credit score can face problems in getting approval from banks while applying for any kind of loan or credit card. Poor credit health could result in a loan being rejected or a higher interest rate being charged on the loan.
Banks typically ask for a guarantor when they are not fully confident of the borrower’s ability to repay the loan or if certain eligibility criteria are not met by the borrower. A guarantor is a person who guarantees to pay for the debt, if the primary borrower defaults on the loan obligation.
Being a guarantor is not a mere formality to help the borrower, the guarantor is equally responsible for paying off the loan. A guarantor to a loan acts as a co-signer of sorts, in that he can pledge his own assets or services if incase the principal borrower cannot perform his/her obligation.
Let us take the example of Harish, a 27 year old youth from Delhi, earning a decent salary. Harish wanted to buy a house for his parents and was confident that his home loan application would be approved by the bank. However, he was taken by surprise, when the bank rejected his application.
The reason for his loan rejection was that he had signed as a guarantor for one of his friends, who had defaulted on loan repayment, and this in turn lowered his credit score.
Individuals should be careful while signing as a guarantor for a loan taken by another person, as it can have a negative effect on his/her credit health. If the primary borrower repays the loan provided by the banks and financial institutions properly, the guarantor will benefit from it as it would reflect in his credit report. On the other hand, if the primary borrower defaults on the loan, this would have a negative effect on the credit score of the guarantor. Not only this, the guarantor will be liable to pay on behalf of the primary borrower.
An individual should become guarantor for a loan taken by his/her relative or friend, only if he/she is confident of the latter’s financial situation. Being a guarantor on a loan entails as much risk as being a borrower of the loan and could affect your credit score negatively too. As a result, one could face problems while applying for loans and credit cards. This is exactly what happened with Harish.
One should, therefore, be extremely careful while guaranteeing a friend’s loan. Even if the guarantor has a good repayment track, the defaults made by the primary borrower can affect the creditworthiness of the guarantor.
Hence, one should be fully aware of the pros and cons associated being a guarantor, before helping your friend or relative in getting a loan
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