While we are on the topic of loan guarantee, (See previous post- Guaranteeing a loan? Be careful!) it is important to know why and when will the lending bank insist on a guarantor to approve your loan.
When a guarantor may be required?
- If the applicant does not have a regular income.
- If he is not professionally qualified, or is self-employed.
- If there is no joint applicant to the loan.
- If the applicant is applying for a loan to purchase a home in a place which isn’t his city of residence or if he lives abroad for long periods of time, the bank may insist on a guarantor.
Why, in such cases, a guarantee becomes necessary?
In case if a loan default, it gets very difficult for banks to sell the mortgaged property, or to attach the assets of the borrower to recover the amount, as there is no clarity on the legal recourse the banks can take in such matters. That could be the reason one sees some banks secretly hiring local goons or recovery agents, as they are commonly known, to threaten and put pressure on the defaulters. J. Hence it becomes essential for the banks to insist on a guarantor if they have even the slightest doubt about the repayment capacity of the borrower. More so, if the loan amount is large.
Who is qualified to become a guarantor?
Apart from education loans, for which it is one of the earning parents of the student who acts as the guarantor, usually relatives are not allowed as guarantors in most cases. It has to be someone not related to the borrower. Also, the guarantor has to satisfy the basic criteria like age, income and repayment capacity, as he or she becomes equally liable to repay the loan in case of a default.
Guarantors are also insisted when the loan is granted to legal entities like partnership firms or Companies. The guarantee is from the partners and the directors.