'A friend in need is a friend in deed' goes the age-old saying. Many of us believe this notion when a friend asks for help. But in today's day and age, what one doesn't realise is that these ideas have to be taken with a grain of salt, especially when it comes to financial transactions
Take, for example, the case of 29-year-old Rohit, hailing from Saharanpur, who dreams of buying a house in Powai. Rohit works with a private equity firm and earns a good six-digit salary. On immaculately collating all the requisite documents and having an impressive salary certificate attached to his loan application, Rohit was confident of getting the credit sanction within days.
However, to his shock, he was informed by the bank that his loan application was not sanctioned owing to his credit history and credit score. This fact surprised Rohit since he has never borrowed before and holds only two credit cards on which he diligently makes sure to pay his EMIs on time.
His credit card statements have been regularly showing no outstanding amount and no days past due, month on month. On further probing with the bank, he was advised to get a copy of his credit history from a credit information company (CIC). A CIC collects and maintains records of an individual's payments pertaining to loans and credit cards.
These records are submitted to the CIC by banks and other lenders on a monthly basis. This information is then used to create a Credit Information Report (CIR), which is provided to lenders to help evaluate and approve loan applications. On getting a copy of his CIR from Cibil, Rohit saw that the discrepancy in his credit history and credit score had nothing to do with his own credit behaviour.
It was due to the defaulting of the EMIs on a loan taken by his friend, that Rohit's CIR showed a negative impact. Are you wondering why? That's because Rohit was the guarantor on this friend's home loan, taken two years ago. It was only then that Rohit realised that by pledging as a guarantor on the loan of his friend, he was also legally responsible towards the timely repayment of the loan and his credit history and credit score gets impacted because of this loan.
It is important to understand that as a guarantor on any form of loan, one is equally responsible to ensure the repayment of the loan. A guarantor pledges to repay a loan on behalf of a third party who has taken the loan. Hence, he provides a guarantee to the lender, that he will honour the obligation, in case the principal applicant (in this case Rohit's friend) is unable to do so. Also, on the other hand, a guarantor's credit score may be checked by banks depending on their credit sanctioning policies
However, it is always a prudent practice to have a guarantor who has a higher credit score to guarantee your loan facility. Since Rohit was not under any financial liability, his friend's loan was sanctioned immediately. But his friend's default on the loan repayment hit Rohit's CIR and credit score negatively.