Home Document as Bank Guarantee for Business loan

POSTED BY Sunny ON February 24, 2012 12:41 pm COMMENTS (5)

Hi ,
My uncle is seeking a business loan as he needs a good cash flow for his business and my father wants to help him.
The way he can help is, He will put our house document as a collateral/guarantee for the loan my uncle will take. And obliviously my uncle will pay the interest to the bank for whatever amount he uses. My father has a 7 year old home loan on the house and half the amount is pending and he plans to pre pay the amount so he can put documents for uncle\\\’s loan. He is fine with the idea of not getting tax exemption for home loan.

My question is:
1. Is there any other drawback of this kind of deal(other than home loan tax exemption)? Will my dad’s credit history will hamper if my uncle defaults on any of the EMI?
2. what if we want to sell the house?
3. And last my uncle told me that he will be charged interest only for the amount he uses..i.e. if 25 lac loan is sanction and if he uses only 2 lac for 15 days and keep balance with the bank..he will be charged only that amount and for that period. (He plans to use some amount out of total for few days of each month, as I told you its just for solving cash flow problem.)
Just to mention, My father wont gain anything out of this he just want to help my uncle. So even if there minute disadvantage, please let me know.
Please advice.

5 replies on this article “Home Document as Bank Guarantee for Business loan”

  1. Sunny says:

    Thanks Ashal But we know what we are doing so 🙂

    And yes such arrangement is possible.

  2. Dear Sunny, as far as I know, for a running home loan property, only the actual owner of the property may avail any new credit on the same home. So the very basic structure of your deal is punctured here.

    Only your father may get this OD kind facility & not your uncle.

    In case the bank is common i.e. home loan to your father & OD account to your uncle, even then, as the original loan is still pending, the house as a collateral can be used only for father & not any one else.

    I’m unable to understand, when your uncle is already running a business, why he is not putting his own assets fort such OD facility?

    My take ‘ll be to not enter in such shoddy deals.

    Thanks

    Ashal

  3. BanyanFA says:

    I think what your uncle is taking is some kind of Overdraft / CC (Cash Credit) loan for meeting his working capital loans. In such kind of loan facilities, the respective bank gives you a credit limit (just like a credit card). A new CC / OD account is created or linked to the existing current account of the business. As long as the balance is 0 or in credit, no interest is payable on the loan facility. If you draw your account in debit (you took a loan), and your account remains in debit for lets say 10 days, then you would have to pay interest on 10 days on the debit balance. Interest is computed on a daily basis on the daily outstanding amount in account and is charged to the account at the end of the month.

    So if you uncle is taking a CC / OD facility, then he is mentioning it correctly.

    Regards
    BFA

  4. Sunny says:

    Thanks BFA.

    Also would like to know about the last point i have mentioned. Is this is how business operates?

    “My uncle told me that he will be charged interest only for the amount he uses..i.e. if 25 lac loan is sanction and if he uses only 2 lac for 15 days and keep balance with the bank..he will be charged only that amount and for that period. (He plans to use some amount out of total for few days of each month, as I told you its just for solving cash flow problem.)”

  5. BanyanFA says:

    Hi Sunny,
    I can appreciate your concern and If i was in your father’s place I might not go with this kind of arrangement for the following purpose:
    1. I loose my tax advantage of Home Loan;
    2. in order to prepay my homeloan, I will gather funds from my other investments / cash to prepay the loan. Which would take away the opportunity of making additional investment income by prepaying the loan;
    3. If your uncle defaults, the bank will sell off the property to recover the funds;
    4. Your father will not be able to sell the property if he needs to in future till the time your uncle doesn’t clear off the balance and the bank closes the loan facility;
    5. It may result in financial strains in your relationships with your uncle as it would be hanging sword for your father – bank may take away his shelter if the business suffers losses and your uncle doesn’t repay.

    Defaulting of loan payments won’t hamper your father’s credit history as long as he is not one of the parties of the loan.

    I have always learned it and experienced it – money and relationships should not cross beyond blood relatives. The decision lies on your father.

    Regards
    BFA

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