Guarantor personal loans: what are they?

What is a guarantor personal loan?

A guarantor personal loan is backed by a parent or another trusted person in your life, who agrees to take on the debt if you cannot make your repayments. Your guarantor will need to prove to the lender they can afford to cover your loan repayments if you can’t.

Agreeing to be a guarantor can be quite risky, given the fact that you are agreeing to take on responsibility for someone else’s debt.

If someone asks you to be a guarantor for their loan, it may be worth seeking independent legal and financial advice before agreeing.

Do banks offer guarantor loans?

Some banks and lenders may offer the option of having a guarantor secure your personal loan if you do not meet the standard eligibility criteria by yourself. However, each lender has its own lending terms and policies. They may only offer this option if you and your guarantor meet certain eligibility criteria and conditions.

What types of guarantor personal loans are there?

There are generally two types of personal loans that may be available to those borrowing with the support of a guarantor:

Secured personal loans

A secured personal loan usually involves using the item being purchased with the loan funds (such as a new or near-new vehicle) as ‘security’ or collateral for the loan. If the borrower cannot repay the loan, the lender has the right to sell the secured item to recoup its money.

With a secured personal loan backed by a guarantor, another option may be to use an existing asset owned by the guarantor (e.g. their car, equity in a property, etc.) as security for the loan, even if the loan funds are being used for another purpose.

Unsecured personal loans

An unsecured personal loan does not require the borrower or their guarantor to offer security for the loan.

In this situation, if the borrower cannot repay the loan, the guarantor may become responsible for repaying it using their own money.

There is generally more risk for the lender involved in offering this kind of loan and thus the interest rate charged may be higher.

How much can I borrow with a guarantor personal loan?

Your lender will determine the amount you can borrow with a guarantor personal loan when you make your application, based on the following factors:

• The loan’s purpose
• Your creditworthiness
• Your employment
• Your income and expenses
• Any existing debts.

The lender will also typically assess your guarantor based on these factors before approving the loan.

The lender and loan product you choose may also affect the amount you can borrow, as each provider typically sets a minimum and maximum loan amount for its products.

Can I get a guarantor loan if I have bad credit?

You may be able to get a loan that’s backed by a guarantor even if you have bad credit. In fact, this is exactly why some borrowers apply for a loan with the support of a guarantor.

Having a guarantor does not always ensure that your loan will be approved. The lender will usually also assess your application based on other factors to determine that you can afford the repayments.

If both you and your proposed guarantor have a bad credit record, you may not be approved for the loan.

You might consider a bad credit personal loan, but keep in mind that there are risks and potentially better alternatives available.

Who can be a guarantor for a personal loan?

To be a guarantor for a loan you generally need to meet the following criteria:

• be over 18 years of age
• be an Australian citizen or permanent resident
• have a good credit score
• be able to afford the loan repayments if the borrower cannot, or have assets that could be sold in order to repay the loan

It’s common for a guarantor to be a close relative of the borrower, such as a parent or grandparent, but this isn’t typically a requirement for guarantor personal loans (though it may be for some guarantor home loans).

How do I become a guarantor?

If you meet the eligibility criteria to act as a guarantor, you’ll likely need to provide details of your financial situation as part of the loan application. This could include bank statements, payslips and details of assets you own and liabilities you owe.

If the loan is approved, you will need to sign the loan agreement, along with the borrower.

Do personal loans need a guarantor?

Not all personal loans require a guarantor. Your ability to borrow money is typically based on your own financial situation. You may be able to improve your chances of loan approval by opting for a loan that’s secured by an asset (e.g. a secured car loan).

But if you do not meet a lender’s standard eligibility criteria, you may need to apply with the support of a guarantor for the loan to be approved.

What are the risks of going guarantor for a loan?

• Your credit score may be affected if the borrower can’t meet the minimum loan repayments. For example, a default or non-payment on your credit report could make it difficult to borrow money in the future.
• If you make any separate credit applications in the future, you will need to declare that you are already a guarantor for someone else’s loan. This may affect your likelihood of being approved for the new credit.
• If you’ve used an asset you own as security for someone else’s loan, you might not be able to use that same security for your own loans in the future. You could also risk losing that asset if both you and the borrower default on the loan.
• A change to your relationship with the borrower won’t change your legal obligations as guarantor. If they default on the loan, you will need to pay the loan even if you no longer have a relationship with the borrower. You may want to carefully consider your relationship with the borrower before agreeing to guarantee their loan.
• Entering this kind of agreement could put pressure on your relationship with the person you’re acting as guarantor for, who may be a friend or family member, particularly if there ends up being issues with the loan being repaid.

You could decide not to act as guarantor for the loan, but help in other ways, such as by contributing to the borrower’s repayments to help them pay it off faster. However, this would only be an option if the borrower is eligible for credit on their own.

If you do become a guarantor, The Australian Government’s Moneysmart website suggests it could be less risky if the loan is for a fixed amount, with a clear repayment term, so you know how much you are guaranteeing and for how long. It also explains that you may be able to challenge the loan contract if you were pressured into agreeing to become a guarantor, had a disability or mental illness at the time of signing, or were misled or tricked. If you want to make a challenge to the agreement, you may want to seek legal advice, which could be free in some cases.

What’s the difference between a guarantor and co-borrower?

Where a guarantor agrees to become financially responsible for the loan only in the event that the original borrower defaults, a co-borrower is as equally responsible for a joint personal loan as the primary borrower from the get-go.

A co-borrower is subject to the same financial and legal penalties as the original borrower if payments are missed or the loan defaults, meaning the co-borrower’s obligations are the same as if they had taken the loan out personally.

Co-borrowing and having a guarantor for a loan achieve a similar purpose in that they may help someone borrow more than they would otherwise be able to. However, neither arrangement should be entered into without significant consideration of the risks by all parties involved. Always check the Product Disclosure Statement.