Anuj was a skilled software engineer working with a prominent IT firm in Bangalore. Having saved enough money over 5 years of his professional career, he decided to buy his own house in an up and coming location in the city's heart. However, when he applied for a home loan, he was surprised when the bank asked him to get a loan guarantor. He couldn't understand what the problem was since his credit was good. It's when his friend told him that there are many other factors that the banks consider other than the credit score itself when assessing the loan applications.
Most banks generally ask for loan guarantors when they aren't satisfied with the credit report of an individual, especially when they have a bad history such as a name of loan defaulter list, disputes, etc.
A loan guarantor is someone who takes the responsibility of a borrower's repayment. In most cases, they should meet certain criterion to qualify. For instance, they should have a high credit score and a clean credit history (no instance of loan defaulting in the past).
Even if your free credit report looks promising, in some cases it may not be enough. For instance, the following are some common reasons which may compel your lender to push for a loan guarantor for you to receive the loan:
If your job is unstable or you are transferred to new locations frequently then the bank may worry it can't get hold of you if you moved to a different city and defaulted on a loan. Plus, the frequent job changes may project a dicey financial situation on its own.
It is not uncommon for business owners to generate a fluctuating revenue with the varying market conditions. However, from a lender's perspective, it can be an easy red flag when the monthly income varies significantly.
The banks want individuals who have a stable and high income. This is the reason why they seek the details of up to 3 years of the previous income tax returns.
In the case of big loans, such as the home loans that can be as high as Rs. 50 lakhs to Rs. 100 lakhs or even more, the easiest way to get the loan approved is to get it along with a co-applicant. Usually, it's an individual and their spouse. However, when a person wants a massive loan on their own, then to make the arrangement less “risky”, the bank may want a loan guarantor on board for security.
If you are applying for a home loan for a property that’s located in a different city, then it may make the lender uncomfortable. So, even if your free credit report shows timely EMI payments and low credit utilization, the bank may still want a loan guarantor, especially someone who lives in the same city as the bank.
A lot of people underestimate the true significance of becoming a loan guarantor and that the responsibilities that come along with it. For instance, many people believe that a loan guarantor is someone who merely verifies the authenticity of the borrower. However, the actual responsibility is much bigger.
For the banks, a loan guarantor is the “go to” person in case the actual borrower defaults. This means that if the borrower defaults either willfully or because of genuine reasons, then the bank may contact the loan guarantor and ask to get the balance amount cleared. What’s more, they may even put their name on the loan defaulter list right next to the actual borrower. Overall, the damage can be a lot regarding the creditworthiness of the defaulter. Thus, any decision must be taken after due consideration and contemplation.
However, in some situations, you have to augment your creditworthiness through a loan guarantor or a co-applicant. That said, if you score is really good, you may get to enjoy the financial service you seek without fulfilling any additional requirements. Thus, credit building and credit monitoring are the key here.