Financing higher education often requires students to take out education loans. However, many lenders require a guarantor to minimize risk and ensure repayment. A guarantor plays a crucial role in the approval process, acting as a financial backup for the borrower. This article explores the role of guarantors, their responsibilities, and their impact on education loan approvals.
Who is a Guarantor in an Education Loan?
A guarantor is an individual who agrees to take on financial responsibility for the borrower’s education loan in case of non-repayment. Lenders often require guarantors to minimize the risk associated with lending to students who may not have a steady source of income. Typically, parents, guardians, or close family members serve as guarantors, as they are more likely to support the student’s education financially.
Why Do Lenders Require a Guarantor?
Lenders ask for a guarantor to ensure loan repayment due to:
- Risk Mitigation: Students lack stable income and credit history, making them high-risk borrowers. A guarantor reduces this risk.
- Lack of Credit History: A guarantor with a strong credit score improves loan approval chances.
- Higher Loan Amounts: Large unsecured loans often need additional financial backing.
- Improved Loan Terms: A financially strong guarantor can help secure lower interest rates and flexible repayment options.
Responsibilities of a Loan Guarantor
Being a guarantor involves legal and financial obligations:
- Repayment Obligation: If the borrower defaults, the guarantor must repay the loan.
- Impact on Credit Score: Missed payments affect the guarantor’s credit rating.
- Legal Liability: The guarantor is legally responsible for repayment.
- Continuous Monitoring: Staying informed about repayments helps prevent financial risks.
Pros and Cons of Being a Loan Guarantor
Before agreeing to be a guarantor, it’s crucial to understand both the benefits and risks involved:
| Aspect | Pros | Cons |
| Benefits for the Borrower | Helps secure an education loan approval | Puts financial burden on the guarantor |
| Credit Score Impact | Can help the borrower build credit | A default can negatively impact the guarantor’s credit |
| Loan Terms | May lead to lower interest rates | Guarantor is legally liable for repayment |
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Benefits of a Parental Loan Co-Applicant
Having a parental loan co-applicant offers several noteworthy benefits:
1. Higher Approval Chances
When a parent acts as an education loan co-applicant, the approval chances are higher. Lenders prefer having a parent as a co-applicant as it reduces financial risks.
2. Better Loan Terms
A parental education loan co-applicant can lead to better loan terms. When the risk for lenders is reduced, they can offer higher loan amounts and lower interest rates.
3. Income Tax Benefits
As per income tax rules, the parent or the student can claim an education loan tax benefit. Under Section 80E, those repaying the Equated Monthly Installments (EMIs) can claim tax exemptions on the interest paid.
Risks of a Parental Loan Co-Applicant
While beneficial, being a co-applicant also comes with risks:
- Financial Liability: The co-applicant is legally responsible for loan repayment.
- Impact on Credit Score: Missed payments by the borrower affect the co-applicant’s credit.
- Financial Uncertainty: Additional financial obligations may disrupt long-term financial stability.
Factors to Consider When Choosing a Parental Loan Co-Applicant
Before selecting a parent as a co-applicant, consider these factors:
- Income Stability: A steady income source helps secure better loan terms.
- Age Requirements: The co-applicant must meet the lender’s eligibility criteria.
- Financial Stability: Parents should assess their ability to handle financial obligations.
- Legal Awareness: Understanding loan terms prevents legal complications.
Alternatives to Having a Guarantor
If finding a guarantor is difficult, consider these options:
- Collateral-Based Loans: Many lenders offer loans against fixed deposits, property, or assets, often with lower interest rates and no guarantor requirement.
- Marks-Based Approval: Some lenders provide loans based on academic performance, allowing students with high scores to qualify without a guarantor.
- Non-Guarantor Loans: Certain financial institutions offer loans without a guarantor for students enrolled in reputed institutions.
A guarantor strengthens loan approval chances but comes with responsibilities. If securing one is difficult, alternatives like collateral-based loans or marks-based approval can help. Propelld simplifies the loan process with minimal requirements and flexible repayment options, making higher education more accessible.
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Why Propelld?
Propelld offers easy and flexible education loans with quick approval and low interest rates. It provides customized repayment options, making higher education more accessible without financial stress.
The following are the primary benefits of Propelld.
| Particulars | Details |
| Max Loan Amount | 50 Lakhs |
| Collateral | Not Required |
| Moratorium | Available |
| Processing Time | 10 Times Faster than Banks |
| Disbursal Time | 7 Days |
| Approval Rate | Higher than Other Banks |
| Special USP | Marks Based Approval |
| % Financed | 100% of Fees |
FAQs
What happens if the borrower defaults on the loan?
If the borrower fails to repay the loan, the guarantor becomes legally responsible for the outstanding amount.
Can a guarantor withdraw from the loan agreement?
Generally, a guarantor cannot withdraw after the loan is sanctioned unless the lender agrees to replace them with another guarantor.
Does being a guarantor affect my credit score?
Yes, if the borrower defaults or delays payments, it negatively impacts the guarantor’s credit score.
Who can be a guarantor for an education loan?
Typically, parents, guardians, or close relatives with a stable financial background can act as guarantors.
Are there education loans without a guarantor?
Yes, some lenders offer education loans without a guarantor, usually for lower amounts or based on academic performance.