There have been several queries seen in recent times regarding the need for a guarantor when it comes to car loans.
Before delving deeper into car loans and why a guarantor may or may not be required, it is important to elaborate on the nature of what a guarantor actually means. Whenever someone applies for any applicable loan, i.e. home loan, business loan or even other loans, the lending institution or financial institution may ask for providing a guarantor.
This is sometimes given as a pre-requisite for sanctioning or approving the loan in question.
Why does the bank or NBFC put forward this directive? This is because the primary applicant or borrower lacks the full monthly income to repay the loan amount being desired or it is just on the edge, i.e. the borrower has several liabilities and expenses and can just about repay the loan amount from his/her monthly earnings. In cases where the bank or financial institution is still not fully secure about the ability of the borrower to repay the loan, it may seek a guarantor.
This individual or the guarantor is the one responsible for paying outstanding liabilities in case of the failure of the borrower to do so. He/she will have the liability of the outstanding loan amount in case the borrower defaults on payments. This is why becoming a guarantor is something that most people do not wish to do as well. When it comes to a car loan, you should keep in mind that a car loan is a secured loan. What is meant by a secured loan? There are two types of loans that are available in the market-
- Secured Loan
- Unsecured Loan
A secured loan means a loan where the security for the loan taken is the underlying asset itself. In this case, a home loan or car loan are to be perceived as secured loans. The home or car will remain as the key assets securing the loan for the lender. That is the reasons for rates of interest staying on the lower side for these types of loans. Unsecured loans are those which are not secured by any underlying asset, i.e. personal loans. They have higher rates of interest likewise. Now, coming back to car loans, these are secured loans and they come with comparatively lower rates of interest since the underlying asset, i.e. the vehicle, is what secures the loan sanctioned by the lender.
Before applying for a car loan, you should make use of a car loan calculator for working out the total amount you are applying for, the rate of interest, eligibility, total expected EMI, tenure and so on.
Do you really need a guarantor?
In most scenarios, you will not need any guarantor since the security for the car loan is the vehicle or car itself. No other security or guarantor will be needed in this case. Some banks do offer loans against existing vehicles under ownership although this is rare in India. The terms and conditions and rates will be similar to any used car loan in such scenarios while independent valuations will be undertaken by banks and financial institutions for the car with a view towards finalizing the loan eligibility amount.
In some cases, the bank may ask for a guarantor if the income of the applicant is just about meeting the eligibility threshold for the car loan amount or is slightly insufficient. This however varies from one financial institution to another. In most scenarios, no guarantor will be needed for car loans.
Some other key aspects relating to car loans
The eligibility criteria varies from one bank to another in case of car loans. This covers the requirement of minimum income annually, years employed or company turnover prior to approving the car loan in question. For example, if the applicant is a salaried individual, he/she will have to be employed for a minimum of 2 years in order to possess eligibility for a car loan. Self employed individuals in a partnership or proprietorship firm or public/private limited entities should earn at least Rs. 3,00,000 annually in order to apply for the car loan.
The documents needed include the following:
- ID Proof- Passport, Aadhar Card, PAN Card, Voter ID Card
- Address Proof- Passport, Aadhar Card, Electricity or Telephone Bill, Shop & Establishment Act Certificate (applicable in case of self-employed professionals) and others.
- Proof of Income- Bank Statements for last 6 months, Salary Slip & Form 16 for salaried professionals, Income tax returns (for all self employed professionals).
Most financial institutions will require a down payment of anywhere between 10-20% for the car loan to be sanctioned. You should be ready with this amount before applying for the car loan in question.