Guarantor personal loans: What are they?

SEAN CALLERY
Deputy Editor · 27 July 2021
If you think you might not meet the standard eligibility criteria to take out a personal loan, you might consider asking someone you trust to act as guarantor for the loan.

If you submit an application for a personal loan, the lender will generally determine your eligibility based on factors such as your credit history, your income, any debts you already have, your age and how much you are looking to borrow. They do this in order to figure out whether you will comfortably be able to service (i.e., meet the repayments on) your loan.

While you may not prove eligible for a certain personal loan, or loan size, due to your own financial circumstances, you could potentially improve your chances of being approved by having someone act as a guarantor for the loan. However, as we’ll see, this arrangement can be risky.

A guarantor personal loan is a loan backed by a parent or a trusted person in your life who has agreed to accept financial responsibility if you cannot meet your repayments. Your potential guarantor will need to demonstrate to the lender they have the capacity to meet your loan repayments, if you can’t.

Both you and your potential guarantor may want to consider the risks of such an arrangement at length before entering into it, given the significant financial burden that could be placed on the guarantor if you cannot meet your repayments.

Lenders may vary when it comes to the rules and requirements for guarantor loans, so it may be prudent to check with your lender of choice before asking someone to guarantee your loan. Given the commitment involved, it may also be worth considering seeking independent legal and financial advice before agreeing to being a guarantor for someone’s loan.

The table below displays some of our referral partners’ unsecured personal loan products for a three-year loan amount of $20,000 in NSW. The products are sorted by Star Rating (highest to lowest) followed by comparison rate (lowest to highest). Use Canstar’s personal loan comparison selector to view a wider range of products on Canstar’s database. Canstar may earn a fee for referrals. Read the Comparison Rate Warning.

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 and unsecured personal loans.

Secured personal loan

A secured personal loan usually involves using the item being purchased with the loan funds (often 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 that may be available is to use an existing asset owned by the guarantor (e.g. their car) as security for the loan, even if the loan funds are being used for another purpose.

Unsecured personal loan

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 funds. There is generally more risk involved in offering this kind of loan for the lender and, as a result, the interest rate charged may be higher.

How much can I borrow with a guarantor personal loan?

The amount you can borrow with a guarantor personal loan will be determined by the lender when you make your application. A lender will usually consider factors such as the loan purpose, your creditworthiness, your employment situation, your income and regular expenses, as well as any other debts you have. The lender will also typically assess your guarantor based on these factors before approving the loan.

The lender and loan product you choose may affect the amount you can borrow too, 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 sometimes exactly why some borrowers need to apply for a loan with the support of a guarantor. Having a guarantor is not a guarantee that your loan will be approved, however, and the lender will usually also assess your application based on other factors to ensure 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 relative of the borrower, but this generally isn’t a requirement.

How do I become a guarantor?

If you meet the eligibility criteria, to act as a guarantor you would typically 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.

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

What are the risks of going guarantor for a loan?

If you are thinking about becoming a guarantor for someone’s loan, you may want to consider some of the risks associated with this decision.

  • Your credit rating may be affected if the borrower can’t meet the minimum loan repayments. For example, a default or non-payment on your credit report may make it difficult to borrow money in the future.
  • If you have agreed to be a guarantor for someone else’s loan, you would need to declare that on any separate credit applications you decide to make in your own name in the future. This may impact your likelihood of being approved for the new credit.
  • If you’ve provided an asset as security for someone else’s loan, you might not be able to use that security for your own loans in the future. You may 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 cause damage to 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.

If you’re considering becoming a guarantor for someone’s loan, you may want to closely consider all the pros and cons before making your decision. You could decide not to act as guarantor for the loan, but help in other ways, such as contributing to some or all of 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 without a guarantor.

To avoid financial stress, you may want to seek professional financial advice or counselling, and thoroughly check the terms and conditions of the loan agreement before signing up to be a guarantor.

If you do become a guarantor, Moneysmart suggests it may 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, you had a disability or mental illness at the time of signing, or were misled or tricked. You may want to seek legal advice, which could be available for free in some situations, if you want to make a challenge to the agreement.

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

Whereas 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 the loan as the original or main 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 and weighing of risks by all parties involved.

This article was originally written by James Hurwood. Main image source: Iakov Filimonov (Shutterstock). 

This content was reviewed by Sub Editor Jacqueline Belesky as part of our fact-checking process.


Sean has accumulated more than a decade of experience in journalism and communications roles in Australia, the UK and Ireland. His work covers a range of topics including finance, banking, property, investing, consumer and legal affairs, and more.

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