Planning to Be a Loan Guarantor? Here’s How It Can Impact Your CIBIL Score

Becoming a loan guarantor for a friend or family member may seem like a simple favor. Often, borrowers assure you that it is merely a formality and that repayments will be made on time. However, agreeing to be a guarantor is a serious financial commitment that can directly affect your CIBIL score and future loan eligibility.

Before saying yes, it is important to understand how being a guarantor works and the potential risks involved.

What Happens When You Become a Guarantor?

When you agree to act as a guarantor, the loan account becomes linked to your credit profile. While the borrower is primarily responsible for paying the EMIs (Equated Monthly Installments), you act as a backup for the lender. Banks and non-banking financial companies (NBFCs) treat guarantors as secondary repayment sources in case the borrower defaults.

This means that although you are not the one taking the loan, the financial obligation is reflected in your credit history.

Will It Affect Your CIBIL Score?

The impact on your CIBIL score depends largely on the borrower’s repayment behavior.

If EMIs Are Paid on Time

If the borrower makes all EMI payments on schedule and maintains the loan account properly, there is generally no negative impact on your credit score. The loan will remain linked to your credit profile, but as long as it is serviced regularly, it does not harm your credit standing.

If EMIs Are Delayed or Missed

Problems arise when the borrower fails to pay EMIs on time or stops repayment altogether. In such cases, the lender may report the default to credit bureaus, and this negative information can affect your CIBIL score as well.

Financial experts warn that even if you manage your own loans responsibly, someone else’s repayment failure can damage your credit history. Many people overlook this risk when they agree to become guarantors.

A drop in your CIBIL score can make it harder to secure loans in the future, including home loans, car loans, or personal loans. It may also result in higher interest rates if your creditworthiness is perceived as weaker.

Impact on Your Future Loan Eligibility

The consequences of being a guarantor go beyond your credit score. Even if the borrower pays on time, the loan may still affect your borrowing capacity.

When you apply for a loan in the future, lenders assess your financial obligations before approving your application. Some banks and NBFCs consider the guaranteed loan as a potential liability. In simple terms, they assume that you may have to repay it if the borrower defaults.

As a result, your loan eligibility could be reduced. For example, if you apply for a home loan or car loan, the lender might lower the amount you qualify for because you are already linked to another active loan account.

Can You Withdraw as a Guarantor Later?

One crucial point to understand is that once you agree to become a guarantor and sign the loan documents, you cannot easily step back. Your responsibility remains until the loan is fully repaid or the lender formally releases you from the guarantee.

This means you are financially tied to the loan for its entire tenure. If the borrower faces financial trouble midway, you may be legally required to step in and repay the outstanding amount.

Key Questions to Ask Before Agreeing

Before becoming a guarantor, consider the following:

• Is the borrower financially stable and disciplined?

• Do you fully trust their repayment capacity?

• Can you afford to repay the loan if the borrower defaults?

• Are you comfortable with the potential impact on your own loan eligibility?

Carefully evaluating these factors can help you avoid unexpected financial stress in the future.

The Bottom Line

Agreeing to be a loan guarantor is not just a symbolic gesture—it is a binding financial responsibility. While there may be no immediate impact if repayments are made on time, any default can directly harm your CIBIL score and reduce your borrowing capacity.

Before committing, weigh the risks and ensure you are prepared for all possible outcomes. A thoughtful decision today can protect your financial stability tomorrow.