Applying for a car loan but aren't sure if your profile stacks up for approval? Adding a parent or grandparent as a guarantor to your application could be the answer. Here's what you need to know about how guarantors work on a car loan and what it means for everyone involved.
What is a car loan guarantor?
As is the case with home loans, a car loan guarantor is someone who agrees to take on legal responsibility for another person's car finance deal if they're unable to meet their repayments.
By signing the loan agreement, the guarantor is essentially putting their hand up to cover the car loan if the borrower defaults, which gives the lender an added layer of security. They’ll usually use either savings or equity in property to act as security for the loan.
It’s commonly used by younger borrowers or those with a limited credit history. If the borrower keeps up with their repayments, the guarantor's involvement stays in the background. It's only if the borrower defaults that the guarantor is brought into the arrangement.
Who might need a guarantor for their car loan?
A guarantor can be beneficial for a range of car loan applicants, but is most commonly used in the following situations:
- Young borrowers with little to no credit history: if you're a student who’s never taken out a loan or credit card before, lenders have nothing to assess your creditworthiness against, making it harder to get approved without additional security.
- Borrowers with a low credit score: a history of missed payments, defaults or other negative marks on your credit file can make lenders hesitant, so a guarantor can help offset that risk.
- First-time car buyers: particularly those entering the workforce for the first time, who may not yet have the income history or financial track record lenders look for.
- Borrowers on a lower income: if you’re a lower income earner, a guarantor can give the lender more confidence to approve the application.
- Casual or self-employed workers: lenders generally view irregular or variable income as higher risk, and a guarantor with a stable income can strengthen the application for a casual employee or someone who’s self-employed.
- Recent arrivals to Australia: if you're new to the country as a temporary resident and haven't yet built any credit history here, a guarantor may be required to access finance.
Who can be a guarantor on a car loan?
Most lenders require the guarantor to have a close personal relationship with the borrower. This is typically a parent or grandparent, though some will also accept siblings, other close family members, a spouse or domestic partner or, in some cases, a close friend.
In terms of eligibility, lenders will typically require a guarantor to meet the following criteria:
- Be over the age of 18
- Be an Australian citizen
- Have a good financial record and stable income source that’s sufficient to cover loan payments
- Have a good credit score
- Hold adequate savings or equity in property to secure the debt
- Have a clear understanding of the responsibilities involved
How to apply for a car loan with a guarantor
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Speak to your guarantor
Sit down with your chosen guarantor about the agreement before you apply.
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Fill out Savvy’s simple online form
Tell us about yourself, the amount you’re after and your finances.
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Supply any required documents
We’ll need to verify your identity and income before proceeding with the process.
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Have a chat with your broker
Your broker will give you a call to talk you through your options, including your next steps with your guarantor.
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Get your application prepped and submitted
Once we have all the information, your broker will put your application together and submit it to your lender.
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Receive formal approval and sign off
Once it’s approved, we’ll handle settlement, so all you have to do is sign off and drive away!
What to consider before becoming a car loan guarantor
While applying with a guarantor can be greatly beneficial for certain borrowers, there’s a fair bit to think about if you’re the one who’s being asked to go guarantor on a car loan. Here are some of the things you should consider before signing on the dotted line:
You're legally responsible for the debt
By signing as a guarantor, you're entering into a legally binding agreement. If the borrower can't make their repayments, the lender can pursue you for the full outstanding loan amount, including any interest and fees that have accrued.
It could affect your ability to borrow
Being listed as a guarantor on someone else's loan is treated as a contingent liability, which means it can impact your borrowing capacity if you apply for a loan yourself. Lenders may take it into account when assessing your own loan applications.
Your assets could be at risk
If the borrower defaults and you're unable to cover the debt from income alone, the lender may look to recover the outstanding amount from your savings or property. It's important to be confident in the borrower's ability to repay before agreeing.
It may affect your credit file
If the borrower misses repayments or becomes unable to repay the loan, this can flow through to your credit file as the guarantor. Maintaining a clean credit history depends in part on the borrower managing their repayments responsibly.
Have an open conversation with the borrower
Before agreeing to act as a guarantor, it's worth having a frank discussion with the borrower about their financial situation, employment stability and how they plan to manage the repayments. Going in with a clear picture and understanding of what might happen if something goes wrong reduces the risk of surprises down the track.
Is it possible to remove a guarantor from my car loan?
Yes, you can remove a guarantor from your car loan. There are two main ways to go about it:
Refinance your loan
Refinancing involves taking out a new loan in your name to pay out and replace the existing one, allowing you to remove the guarantor from the arrangement entirely. This is one of the most straightforward routes, but it does require your financial position to have improved enough since the original loan was taken out to qualify independently.
If your credit score has grown and your income is stable, refinancing could be a clean way to remove your guarantor and potentially secure a better rate at the same time.
Request that your lender releases the guarantor
Some lenders will consider releasing a guarantor without requiring a full refinance, provided the borrower can demonstrate they no longer need the additional security. Some of the ways to do this include establishing a strong repayment history over a sustained period, a meaningful improvement in your credit score and a sufficient reduction in your outstanding debt.
The lender will reassess your current financial position before making a decision, so it's worth approaching them once you feel your circumstances have improved enough to go out on your own.
Pros and cons of having a guarantor on your car loan
Pros
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Increases your chances of approval
If your credit history or income isn't strong enough for you to qualify on your own, a guarantor can give your lender the additional security they need to approve your application.
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May help you access a better interest rate
Lenders may be willing to offer a more competitive rate when a guarantor is involved, as the additional security reduces the risk of the loan from their perspective.
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Helps you build your credit history
Successfully managing a loan and making consistent repayments is a good way to establish or rebuild your credit profile, which can make it easier to access finance independently in the future.
Cons
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Can strain personal relationships
Money and personal relationships don't always mix well. If something goes wrong with the loan, it can create tension or damage the relationship with your guarantor.
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Puts your guarantor's finances at risk
If you're unable to keep up with repayments, your guarantor becomes liable for the debt, which could put their savings, property or credit file on the line.
What are the alternatives to a guarantor on my car loan?
There are several options you may wish to take if a guarantor isn’t available or you simply decide that it isn’t right for you:
- Apply with a co-borrower: one option is applying for the loan jointly with another person, such as a partner. Both applicants share equal responsibility for the debt from the outset, which is a different arrangement to that of a guarantor. However, if you’re sharing the car, it can be an effective way to manage the debt together.
- Save a larger deposit or choose a cheaper car: putting more money down upfront reduces the amount you need to borrow, which lowers the lender's risk and can make your application more attractive without the need for a guarantor. Alternatively, opting for a cheaper model may put you in striking distance of approval on your own.
- Work on your credit score: taking some time to build your score before applying can improve your chances of approval. Paying down existing debts, meeting all your current repayments on time and avoiding multiple credit applications in a short period can all help.