Owning a car, whether a brand-new model or a trusted pre-owned one, often means taking out a loan. Even though car loan approval processes are relatively straightforward, but sometimes; you may not meet all the eligibility criteria. Maybe your credit history is thin, or your income pattern (sporadic or inconsistent) makes lenders cautious. This is where a guarantor can make all the difference. A guarantor steps in as an added layer of confidence for the lender, and this support can increase your chances of getting car finance.
In this article, we explore who loan guarantors are, what their responsibilities look like, the criteria they need to meet, and how having one can help you get approval faster.
Importance of a Guarantor in a Car Loan
A car loan guarantor is a borrower who legally agrees to take full responsibility for the repayment of your car loan debt in case you, the primary borrower, fail to make scheduled Equated Monthly Instalments (EMIs). Consider the guarantor to be a co-signatory to your commitment. By signing the guarantee, the guarantor provides the lender with additional assurance that the debt will be repaid, regardless of the guarantor's financial circumstances. This assurance considerably reduces the risk for the lender.
Why Would a Lender Require a Guarantor?
Lenders (both banks and Non-banking finance companies (NBFCs)) require guarantors in cases where the primary applicant does not have a strong credit profile or is perceived as high-risk. The following are the most common cases in which a guarantor for a car loan may be sought:
- No credit history: You might be a young professional or first-time borrower, and thus may not have a credit history based on which the lender could make an assessment.
- Low credit score: A poor credit score (below 700), may hint at repayment issues and thus makes the lender wary.
- Unstable income: A borrower who is self-employed or has just recently changed employment may have a financial profile considered less stable than that of a salaried employee.
- High loan amount: In the case of a very large loan request, the lender may ask for a stronger combined profile to approve the financing.
Having a guarantor on car loans may improve the chances of having your loan approved and may even lead to better terms. This may include car finance with a guarantor and a low Annual Percentage Rate (APR), due to the reduced risk for the lender.
Guarantor Requirements for Car Finance
The strength of your guarantor's profile influences the car loan approval process and, subsequently, the loan terms you get. The guarantor criteria/requirements for car finance is typically as follows. This ensures they can actually cover the debt, if required.
Car Loan Guarantor Document Checklist
Car loan guarantor requirements when securing finance are similar to those expected of the borrower and may typically include: proof of identity, residence, and income. Usually, car loan documentation includes:
- PAN and Aadhaar for identity.
- Photocopies of the latest Income Tax Returns (ITR) and/or recent salary slips.
- Bank statements that reflect 3–6 months of consistent income and financial stability.
Related Reading: If you’re planning to buy a new or used car, check out our blog “All You Need to Know About GST on Used Cars” to learn how taxation impacts the overall cost of pre-owned vehicles.
Crucial Role of a Guarantor in a Car Loan
It is essential to understand the role of the guarantor in loan repayments before anyone agrees to co-sign, as they perform the following key roles:
1. Guarantor Responsibilities in a Car Loan
The guarantor liability in loans is defined under Section 128 of the Indian Contract Act. As a rule, the liability of the guarantor is co-extensive with that of the borrower. This means that in the case of default by the primary borrower; the lender can pursue the guarantor repaying for the entire outstanding amount, inclusive of penalties, interest, and processing fees.
- Repayment obligation: In case the borrower defaults, the guarantor may be required to repay the EMI.
- Legal liability: The lender can sue the guarantor for non-payment of the loan amount.
2. Lending Authority Risks
In case of non-payment of one EMI by the principal borrower, and the guarantor does not pay it off immediately. The default may get reported against both the borrower and guarantor. Thus, it may affect the credit score of the guarantor adversely at times. Some of the loan guarantor risks are:
- Reduced car loan eligibility criteria: The guaranteed loan is added as a contingent liability in the guarantor’s profile. This means it negatively impacts the remaining amount they can borrow in the future.
For example, if a guarantor is eligible for a personal loan of ₹10 lakh, and they back a car loan of₹5 lakh for someone else, the lender may consider only the remaining ₹5 lakh as their available borrowing capacity. - Quick tip: Becoming a guarantor is a serious financial commitment. The borrower and the possible guarantor should read the loan agreement carefully and understand the liability before proceeding.
Co-Applicant Vs Guarantor: What's the Difference?
Many people believe that a guarantor is the same as a co-applicant, but in fact, they are very different in terms of their respective roles:
Guarantor on Car Loan Approval: Key Takeaways
Applying with a guarantor may make it easier to bring your new car home, especially when a thin credit history is slowing down your approval. Once you have someone with strong finances who meets the lender’s criteria, your chances of getting car finance rise quickly.
A guarantor loan is not only about giving comfort to the lender. As a borrower who has taken a loan with a guarantor, staying disciplined with your repayments protects your credit score and maintains that trust.
Apply for a used car loan with Shriram Finance and get competitive interest rates and flexible repayment options. For more information, please visit our website.
FAQs
1.Why do banks or lenders ask for a guarantor in a car loan?
Lenders demand a guarantor when the primary borrower's profile is not capable enough, in terms of credit score, income, or employment history, to take care of the loan on his/her own.
2.Who can become a guarantor for a car loan?
Any close friend or family member who is salaried, with a good credit history-a score above 750-can be a guarantor (along with being within the age bracket and meeting the residency requirements of the lender).
3.Is having a guarantor mandatory for all car loans?
No, a guarantor may be required only when the main applicant does not qualify for a car loan based on the lender's eligibility criteria.
4.What is the difference between a guarantor and a co-applicant in a car loan?
A guarantor steps in only if the borrower fails to pay. A co-applicant shares the loan from the beginning, and the lender counts both incomes to decide the loan amount.
5.What are the responsibilities of a guarantor in a car loan?
The key responsibilities of the guarantor are to repay the entire outstanding loan amount, including both principal and interest with penalties, if the main borrower defaults on repayment.