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Rediff.com  » Business » Think twice before guaranteeing a friend's loan

Think twice before guaranteeing a friend's loan

Last updated on: April 03, 2014 17:43 IST

Nowadays credit score has become a critical factor while availing loans and credit cards from banks and financial institutions.

Be cautious while being a guarantor for a relative's loan.Individuals having low credit score face can face problems at the time of getting bank's approval after applying for any kind of loan.

Having poor credit health can prompt the lender to reject your loan application or to charge you with higher interest rate.

Banks and financial institutions do not solely depend on the financial status of the primary borrower and this is when a guarantor comes into picture.

A guarantor is a person who guarantees to pay for the debt, if the primary borrower defaults on the loan obligation.

A guarantor 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.

Take, for example, the case of Harish, a 27 year old youth from Delhi earning decent salary.

He wanted to buy a house for his parents. And he was confident that his home loan application will be approved by the bank. But he was shocked to learn that the bank had denied his application.

The reason for this 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 other person, as it can have 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 be benefited from it as it will reflect in his credit report.

On the other hand, if the primary borrower defaults on the loan, then it will affect the credit score of the individual. Not only this, the guarantor will be liable to pay on behalf of the primary borrower.

An Individual should become guarantor for a loan of his relative or friend, only if he is confident of the former’s financial situation.

Individuals should know that becoming a guarantor can affect his credit score negatively too. He can also face problems while applying for loans and credit cards. This exactly what happened with Harish.

Hence, one should be extremely careful while guaranteeing a friend's loan.

There are some cases where a guarantor has been penalised when the primary borrower failed to perform his duties.

Even if the guarantor has a good repayment track, the defaults made by the primary borrower can affect the creditworthiness of the guarantor.

Before helping your friend or relative in getting a loan you should be doubly sure about the pros and cons associated with the financial backing of the primary borrower.

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