Getting a quality education is important for every student, but financial support can be challenging for many students. There are various financial options available, such as scholarships, grants, and educational loans. When choosing an educational loan option for your quality education, you must know what a third-party guarantee is.
What is A Third-Party Guarantee in an Educational Loan?
Banks require a guarantee from borrowers to ensure loan repayment. A guaranteed loan involves a third party who agrees to take on the debt obligation if the borrower defaults. For loans exceeding 7.5 lakhs, a loan guarantor is necessary.
Who is a Third Party Guarantor?
A third-party guarantee means that someone other than the borrower, usually a family member or a friend, agrees to take responsibility for repaying the loan if the borrower cannot.
Eligibility Criteria for a Third-Party Guarantor in an Education Loan
Here’s a detailed overview of the eligibility criteria for a third-party guarantor in an education loan:
1. Age Requirement
The guarantor should typically be at least 18 years old. Most lenders prefer guarantors who are not older than 60-65 years to ensure they are financially stable.
2. Income Stability
The guarantor must have a stable and sufficient income. This shows that they can take on the responsibility of repaying the loan if the borrower defaults.
3. Creditworthiness
A good credit score is crucial for a guarantor. Lenders assess the guarantor's credit history to determine their reliability in managing debt.
4. Relationship to Borrower
Lenders often prefer the guarantor to be a close relative, such as a parent, sibling, or spouse, to ensure a personal stake in the borrower's success.
5. Employment Status
The guarantor should be employed or have a consistent source of income, indicating financial stability and the ability to repay the loan.
6. Legal Capacity
The guarantor must be legally capable of entering into a contract. This means they should not be minors or mentally incapacitated.
7. Residency Status
Some lenders require that the guarantor resides in India, which can simplify the loan process.
8. Indian Citizenship
The guarantor must be an Indian citizen, as this ensures that they are subject to Indian laws and regulations regarding loan agreements.
9. Debt-to-Income Ratio
Lenders may evaluate the guarantor’s debt-to-income ratio to ensure they are not over-leveraged and can handle additional financial commitments.
10. Financial Documentation
The guarantor will need to provide financial documents, such as income statements, tax returns, and bank statements, to prove their financial stability and ability to act as a guarantor.
Benefits of Having an Educational Loan Guarantor
Here are the benefits of having an educational loan guarantor
1. Increased Accessibility:
Having a guarantor makes it easier for students to access educational loans. Lenders are more likely to approve loans when someone is backing the borrower, especially if the borrower doesn’t have a strong credit history or income.
2. Customized Loan Options:
With a guarantor, students may have access to better loan terms and conditions. Lenders might offer customized loan options, such as lower interest rates or more flexible repayment plans because they have added security with a guarantor.
3. Faster Processing:
Loans with a guarantor can often be processed more quickly. Since the lender feels more secure with the added backing, they may streamline the approval process, allowing students to get the funds they need sooner to start their education.
Risks and Considerations of Being an Educational Loan Guarantor
Here are the risks and considerations of being an educational loan guarantor.
1. Impact on Credit Score:
If the borrower fails to repay the loan, the guarantor's credit score can be negatively affected. This is because the loan will be reported on both the borrower’s and the guarantor’s credit history. A lower credit score can make it more challenging for the guarantor to secure loans for themselves in the future.
2. Legal Liabilities:
As a guarantor, you are legally obligated to repay the loan if the borrower cannot. This means that if the borrower defaults, the lender can pursue the guarantor for repayment, which can lead to legal action if the debt remains unpaid.
3. Financial Burden:
Being a guarantor can create a significant financial burden, especially if the borrower struggles to make payments. The guarantor may need to step in and cover the loan payments, which can strain their finances and impact their ability to meet their financial obligations.
A third-party guarantee for an educational loan means someone, like a parent or guardian, agrees to pay the loan if the student can’t. This helps students get loans more easily because lenders feel safer. But there are risks for the guarantor, like affecting their credit score and being responsible for the debt if the borrower doesn’t pay, even though it can lead to better loan terms and quicker approvals. Both the borrower and guarantor should understand the terms and conditions before agreeing to ensure everyone is aware of their responsibilities.
