A home loan is a long-term financial decision. As a loan borrower, you need to pay back the borrowed amount in EMIs on principle amount with a floating interest rate. The lender expects loan applicants to follow specific terms & conditions for approval on loan. Banks and financial institutions also ask for a guarantor if they want further assurance and security.
Who is Guarantor?
A guarantor is someone who takes your loan’s responsibility in case of default for whatsoever reason. The loan distributing companies or banks generally require guarantors for big-ticket loan applications as security. These loans are known as guarantor home loans in financial terms.
A guarantor is a vital part of the loan application process and works as a co-signer on the home loan document. It is advisable not to sign up as a guarantor for a social obligation or without giving it much thought because you are taking responsibility for payback the loan amount if the borrower defaults through pledging your assets or properties.
Who can be a guarantor?
- A guarantor needs to be an Indian citizen of a minimum of 18 years of age
- The person must have a good source of income or asset to pay back the lender’s money if the need arises.
- The person should be ready to be in contract until the loan amount is paid off entirely with consent.
Situations when Loan Distributors or banks ask for Guarantor
- If the loan amount exceeds a specific limit set by the loan distributor or financial institutions.
- Low credit score and poor financial standing of the borrower
- History of defaults, late payments, and penalties on previous loans
- The borrower in high-risk jobs or nearing retirement
Self-employed people with unstable or insufficient income
We will explain things to consider before signing up as a guarantor. Read the passage and follow the tips for your financial safety.
Things to consider before signing up as a guarantor for a home loan
The first thing to consider is the reason for making you a guarantor. You must clarify the borrower’s financial standing unless you want the extra liability of paying off the person’s debt. Generally, loan distributors and banks ask for a guarantor when they have doubts about the payback capacity of the applicant.
You are doing a good deed of becoming a guarantor, but it is not wise to take the plunge on your financial condition.
Assess your liabilities and source of income
Even though you ensure the borrower’s ability to pay back, you should assess your liabilities for security. There might be a situation when after all assurances, the loan becomes the default. This will be trouble for your plans.
So, ready for such sudden shocks and plan for signing up as guarantor carefully.
Category of Guarantor
Guarantors are of two types, and financial institutions ask for the category when signing up.
Financial Guarantors, as mentioned above, agree to pay off the debt in case of defaults by the borrower. The person co-signs the agreement and takes the responsibility by pledging property. The person is legally accountable for the loan repayment, and the financial institution is authorized to approach him in any delay, non-payment, and loss of communication from the borrower.
Non-financial Guarantor signs up as a character certifier. The person acts as an alternative contact person in case the borrower is not reachable.
Our verdict: you should go for a non-financial guarantor because it does not have any legal obligation to pay debts. If you want to sign up for a financial guarantor, ensure that the borrower is your confidante and does not leave you off guard.
Impact on Credit Score
To begin with, check your credit score; if it is lower than required, it is advisable not to sign up as a guarantor. If the borrower defaults, your credit score will be downgraded. A low credit score will cause rejections of loan and credit card applications.
So, think about the impact on credit score before signing up for a financial guarantor.
As a guarantor, you are legally committed till the end of the loan tenure. The tenure could be twenty to thirty years. Ask for loan tenure, calculate your financial plans, and after doing all calculations, take further steps.
Bottom line: do not rush for signing up as a guarantor for the home loan. The obligations are much more than meets the eye at the first instance. Your financial liabilities are your obligation, so before taking other’s responsibilities, know all the aspects and plan wisely.