Author: Sean Callery
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 (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 have someone act as a guarantor for the loan. This can potentially improve your chances of being approved
So if you’re looking at guarantor personal loans, or are considering acting as guarantor yourself, what do you need to know? Canstar takes a look below.
What is a guarantor personal loan?
A guarantor personal loan is a loan backed by a parent or trusted person in your life who agrees to accept financial responsibility if you cannot meet your loan repayments. If you can’t make repayments, your guarantor will on your behalf.
Your potential guarantor will need to demonstrate to the lender they have the capacity to meet your loan repayments, if you can’t. As a result, they’ll likely need to be in a better financial position than you. Whether that’s due to a higher wage, lack of debts, or sufficient liquid assets.
Both you and your potential guarantor should 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 can vary when it comes to the rules and requirements for guarantor loans. So, it’s best to check with your lender of choice before asking someone to guarantee your loan. Given the commitment involved, it may also be worth seeking independent legal and financial advice before agreeing to be a guarantor for someone’s loan.
Do banks offer guarantor personal loans?
Some banks offer the option of having a guarantor secure your personal loan. But each provider has its own lending terms and policies. As well as banks, some other types of lenders – such as online-only lenders – offer this type of loan arrangement. So it could be worth comparing a wide range of options.
What types of guarantor personal loans are there?
There are generally two types of personal loans available: 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, it may be possible to use the guarantor’s assets instead. For example, using the guarantor’s car to secure a loan.
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 becomes 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 consider factors such as:
- The loan purpose
- Your creditworthiness
- Your employment situation
- Any debts you have
- Your income and regular expenses
The lender will also 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?
Yes. In fact, this is exactly why certain borrowers apply for a loan with the support of a guarantor.
A credit score can indicate how trustworthy and likely you are to repay the loan without issue. If you have a bad credit score, lenders will see you as a riskier borrower. A guarantor with a good credit score can help ease these concerns. If your guarantor also has a bad credit score, however, you may find it hard to get the loan approved. As the bank may feel your guarantor doesn’t offer much guarantee.
The idea is that your guarantor can step up and take responsibility if needed, so your choice of guarantor needs to reflect this. But it’s important to remember that you and your guarantor’s credit score is just one part of this. The lender assesses your application based on several factors (as mentioned above) to ensure that the loan is repaid.
Who can be a guarantor for a personal loan?
To be a guarantor for a loan you generally need to meet the following criteria:
- Over 18 years of age
- A New Zealand citizen or permanent resident
- Have a good credit score
- Able to afford the loan repayments if the borrower cannot, or have assets that can be sold in order to repay the loan
It’s common for a guarantor to be a relative of the borrower, but it’s generally not a requirement.
How do I become a guarantor?
If you meet the eligibility criteria, to act as a guarantor you typically need to provide details of your financial situation as part of the loan application. This could include bank statements, pay slips and details of assets you own.
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. You may be eligible to borrow money based on your own financial situation, or by getting a loan that is secured by an asset (eg, a secured car loan).
A guarantor is typically only used when an individual cannot get a loan without one, or they cannot secure favourable terms.
What are the risks of going guarantor for a loan?
If you are thinking about becoming a guarantor for someone’s loan, first consider some of the associated risks.
Potential risks to consider include:
- 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.
- It may impact your application for new credit – as you’ll need to declare that you are a guarantor for another loan on any separate credit application. This can possibly impact your ability to take out 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 won’t change your legal obligations – if they default on the loan, you will need to pay it. 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 – if there ends up being issues with the loan being repaid it could impact the relationship with the person, who may be a friend or family member.
Consider it carefully
If you’re considering becoming a guarantor for someone’s loan, you should closely consider all the pros and cons before making a 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 off the loan faster. However, this would only be an option if the borrower is eligible for credit without a guarantor.
Another option could be, if you have the funds, to loan the money yourself. Although this comes with risks of its own.
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, it may be less risky if the loan is for a fixed amount, with a clear repayment term. This way you know how much you are guaranteeing and for how long.
Again, you may want to seek legal advice.
What’s the difference between a guarantor and a co-borrower?
A guarantor agrees to become financially responsible for the loan only in the event that the original borrower defaults. Whereas a co-borrower is as equally responsible for the loan as the original or main borrower from the get-go. Essentially, a co-borrower is taking out a loan, not acting as reassurance for one. Thus, they are subject to the same financial and legal penalties if payments are missed or the loan defaults.
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. But be sure to weigh up the risks to all parties involved.
About the reviewer of this page
This report was reviewed by Canstar Content Producer, Andrew Broadley. Andrew is an experienced writer with a wide range of industry experience. Starting out, he cut his teeth working as a writer for print and online magazines, and he has worked in both journalism and editorial roles. His content has covered lifestyle and culture, marketing and, more recently, finance for Canstar.