A guarantor personal loan is a standard personal loan that uses a third party, known as a guarantor, to guarantee the payment of the loan. This arrangement can be useful for people who have difficulty securing a loan, such as those with a poor or limited credit history, and can help you maximise your borrowing power and secure lower interest rates.
Why apply for a personal loan with Savvy?
What are the requirements for a guarantor?
Your guarantor must be someone in a stronger financial position who is willing to assure the payment of your loan. This means that if you default on your personal loan, they will take on repayments until it’s fully paid out. Typically your guarantor would be someone you have a close relationship with such as a family member or close friend. They will also have to meet certain criteria, such as:
- Having a good credit history.
- Earning a stable income that is enough to cover loan repayments should you default.
- Being at least 18 years old.
- Living in Australia as a citizen or permanent resident.
Your guarantor may also be asked to put up their assets, such as equity in their home or a vehicle, as part of this arrangement. However, full control of these will revert back to the guarantor at the conclusion of your loan.
It’s important to note that while your guarantor agrees to shoulder responsibility for your loan, that this only comes into effect if you fully default on your repayments. If you’re able to keep on top of things, as the vast majority of borrowers do, your guarantor won’t become involved in the loan’s payment at all.
Is a guarantor personal loan the same as a joint personal loan?
No, a personal loan with a guarantor is not the same as a joint personal loan. A guarantor-backed personal loan is suitable when someone needs help qualifying for a loan but needs someone else to act as security. A joint loan, meanwhile, is a loan taken out with another borrower (co-borrower) who is all equally responsible. Here’s a breakdown of how the two arrangements differ:
| Guarantor loan | Joint loan |
|---|---|
| One person takes out a loan and the guarantor acts as security | Two people take out the loan together. |
| The borrower is primarily responsible for repaying the loan. | All borrowers are equally responsible for the loan repayments. |
| Primarily affects the borrower's credit, but can damage the guarantor's credit if the loan defaults. | Affects the credit reports of all parties involved equally. |
| Often used to help those with a poor or limited credit history. | Typically used when both parties need the loan. |
How does a loan affect the guarantor?
When you act as a guarantor on a loan, you take on a serious financial responsibility. While the loan doesn’t appear on your credit file right away and won’t affect your credit score as long as the borrower makes their repayments on time, things can change quickly if they default.
If the borrower falls behind or stops paying, you as the guarantor become legally responsible for the debt. This means you’ll be required to cover the missed repayments and, in some cases, repay the loan in full. If you’re unable to do so, the lender can take legal action, which could include seizing assets you used as security, such as property or savings.
A default on a guarantor loan can also be recorded on your credit file, damaging your credit score and making it harder for you to get approved for credit in the future. Even if no default occurs, acting as a guarantor may reduce your borrowing capacity, as lenders could see the guaranteed loan as a potential liability when assessing your own loan applications.
Because of these risks, it’s important to fully understand the potential consequences and make sure you’re confident the borrower can meet their repayments before agreeing to be a guarantor.
Pros and cons of guarantor personal loans
Pros
-
Greater chance of approval
Having a guarantor can increase your chances of loan approval, especially for borrowers with minimal credit history.
-
Better loan terms
Lenders may offer lower interest rates and better terms due to the added security provided by your guarantor.
-
Opportunity to build credit
Successfully repaying a guarantor loan can help improve your credit score.
Cons
-
Relationship risk
Defaulting on your loan can strain your relationship with the guarantor, who becomes responsible for your loan payments.
-
Financial burden
Your guarantor must be prepared to take on the financial burden of repaying the loan if you default, which can be a significant risk.
-
Credit impact on guarantor
If you default and your guarantor has to step in, their credit score can be negatively impacted.
Which lenders offer guarantor personal loans?
While guarantor home loans are widely offered to help people get on the property ladder, guarantor personal loans are less common. Some banks and online lenders may allow you have a personal loan or car loan with a guarantor but they aren’t available everywhere, so you may need to do a bit of research to find out who offers them. It’s worth comparing a broad range of lenders to see who can accommodate your situation. Speaking with a broker can also help, who can discuss your options with you and guide you towards the most suitable loan for your circumstances.
How to apply for a guarantor personal loan
-
Choose your guarantor
Find someone willing to act as your guarantor. Make sure they understand their responsibilities and are fully aware of what’s involved before they agree. You’ll also need to make sure they meet the eligibility criteria for a loan.
-
Research your loan options
Once you’ve done this, you’ll be able to assess the products on offer from our partnered lenders. A member of our team will reach out to help you choose the best available offer.
-
Prepare your documentation
You and your guarantor will need to provide various documents, including proof of identity, income verification and credit history. Your guarantor may also need to provide documents related to their assets, such as property.
-
Apply with your guarantor
Your guarantor is involved right from the application stage. The lender will assess your financial position and the guarantor’s ability to step in if needed, and both of you will need to undergo credit checks and affordability assessments.
-
Sign the loan agreement
Both you and your guarantor will be required to sign the loan contract. Your guarantor’s signature confirms they accept full responsibility if you fail to meet repayments. Once signed, the funds are paid out to you. Your guarantor usually won’t be involved again unless there’s a repayment issue – but they remain legally tied to the loan until it’s fully repaid.
