Guarantor personal loans: what are they?

What is a guarantor personal loan?

A ‘guarantor personal loan’ isn’t a loan type in itself, rather it’s a personal loan that allows a borrower to ask someone close to them, normally a family member or spouse, to agree to take on the debt if they can’t make their 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 risky, as you could end up responsible for someone else’s debt. It’s recommended you seek independent legal and financial advice before agreeing to be a guarantor for someone’s loan.

Which banks offer guarantor personal loans?

Some banks and lenders may offer the option of having a guarantor secure your personal loan. This might be an option for you if you don’t meet the eligibility criteria by yourself or if you don’t qualify for a competitive interest rate or favourable terms. However, each lender has its own policies. Some may not allow for guarantors on personal loans, while others may only offer this option if you and your guarantor meet certain criteria.

What types of personal loans allow guarantors?

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

Unsecured personal loans

An unsecured personal loan doesn’t need an asset to be used as security. If the borrower can’t repay the loan, the guarantor may become responsible for repayments instead.

Unsecured loans are generally riskier for a lender, and many charge higher interest rates on unsecured loans as a result.

Secured personal loans

A secured personal loan usually involves using the asset being purchased with the loan funds (such as a new car) as ‘security’ or collateral for the loan. If you can’t repay the loan, the lender can sell the asset to recoup the remaining loan balance.

If you have someone willing to act as guarantor on your loan, an asset owned by the guarantor, like a car or equity in a property, may be able to be used as security for the loan.

How much can I borrow with a guarantor personal loan?

Guarantor or no, your lender will determine the amount you can borrow with a personal loan based on the following factors:

• Your income and expenses, which it will use to assess how much you can afford to repay.
• What you’re using the loan for, like to buy a car, renovate your home, or go on holiday.
• Your creditworthiness, expressed through your credit score and history.
• Your employment situation.
• Any existing debts.

The lender will also typically assess your guarantor based on these factors as well before approving the loan. After all, if you default, your guarantor needs to be able to repay the debt.

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

If you have bad credit, you might be able to get a loan, or improve the interest rate or loan terms on the table, if you’re backed by a guarantor. But having a guarantor doesn’t guarantee your loan will be approved.

A lender will assess many factors in your application to determine if you can afford repayments. And if both you and your proposed guarantor have a bad credit history, you may not be approved for the loan.

Who can be a guarantor for a personal loan?

To be a guarantor you’ll 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 and history
• 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 relative of the borrower, such as a parent or grandparent, but this isn’t necessarily a requirement.

How do I become a guarantor?

If you meet the eligibility criteria to act as a guarantor, you’ll likely need to provide details on your own financial situation as part of the loan application. This could include bank statements, payslips, and details of assets you own and debts you already have. If the loan is approved, you’ll also need to sign the loan agreement.

Some lenders might also request guarantors get independent legal or financial advice before signing up. 

Do personal loans need a guarantor?

No, 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 (like a secured car loan).

But if you don’t meet a lender’s eligibility criteria, you may need to apply with the support of a guarantor in order for the loan to be approved.

What are the risks of being a guarantor for a loan?

• Your credit score could be affected: If the borrower can’t meet their minimum loan repayments you’ll likely end up responsible for paying them. If you can’t, or you miss a repayment, your credit score could take a hit.
• It might impact your ability to borrow money: If you apply for a new loan or credit product in the future, you’ll need to declare that you’re already a guarantor for someone else’s loan. This may affect your borrowing power and your chances of being approved.
• May be limited in how you use your asset: If an asset you own is used as security for someone else’s loan, you might not be able to sell or alter that asset. You might also be limited in using that same asset as security for your own loans in the future and could risk losing it if both you and the borrower default on the loan.
• Relationship strain: Being guarantor on a person’s loan could put pressure on your relationship with them, particularly if there ends up being issues with the loan being repaid. A change in your relationship with the borrower won’t alter your legal obligations as guarantor.

Even if you decide not to act as guarantor for a person’s loan, you can still help in other ways, like by gifting them money to put towards their purchase or contributing to their repayments.

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 equally responsible for a joint personal loan from the beginning.

A co-borrower is subject to the same financial and legal penalties as the other 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 on their own.

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 considering the risks. Always check a loan product’s Key Facts Sheet and Product Disclosure Statement (PDS) before signing up.