What is a guarantor loan?

Whether it’s time to consolidate your debts or plan your dream wedding, sometimes we all need a little help. A personal loan can bridge the gap in your budget and help you reach your goals faster.

When you apply for a personal loan, some lenders will allow you to have a family member or friend act as a guarantor. This means they co-sign the loan and agree to accept responsibility for the repayments if you default for any reason.

Pros and cons

Having a guarantor on your personal loan might improve your chances of being approved, especially if you are self-employed or have a low credit score. This is because your guarantor acts as a type of security, making it less risky for your lender to loan you the funds.

You might also be able to secure a lower interest rate if you have a guarantor on your personal loan, which means you’ll save money over the life of the loan.

These are some of the pros to having a guarantor on your personal loan. But remember, it’s a big responsibility for both of you. If you can’t make repayments down the track, your guarantor will need to foot the bill, which could damage your relationship or impact family dynamics.

Before you take this step, make sure you can afford the monthly repayments in addition to your other bills. Are you sure your income and expenses will remain the same throughout the whole term of the loan? If your circumstances change, could you still afford this additional debt?

Who can go guarantor?

Every lender is different. While all of them will allow your parents or guardians to take on the role of guarantor, others might also allow relatives, like siblings and grandparents. In some cases, lenders may even permit friends to act as guarantors, if you can prove a long and steady relationship.

Make sure your guarantor meets these basic criteria:

  • Over 18 years of age.
  • A citizen or permanent resident of Australia.
  • Able to prove their income and employment.
  • Able to show sufficient savings and have an asset they can put up as security against the personal loan.

Secured guarantor personal loans

When a family member or friend acts as guarantor, they may choose to use their car, property or other valuable asset as security for the personal loan. This means that if you’re unable to repay the loan, the lender has the right to seize and sell the asset to cover the cost of the loan.

A secured loan is less risky for the lenders, which often means they’ll offer a lower interest rate and may allow you to borrow a larger amount than would be available to you if the loan was unsecured.

Unsecured guarantor personal loans

In the case of an unsecured guarantor personal loan, you and your guarantor don’t need to provide an asset as security against the loan. Instead, the lender looks at the credit history of both you and your guarantor, and your ability to make repayments.

The good news is your guarantor’s personal assets are safely out of the firing line if you default on the loan. But if you can’t make repayments, the credit rating of both you and your guarantor will be affected.

A low credit score will make it harder for both of you to obtain loans or credit in the future. This could impact not only your financial health, but also the health of your relationship with your loved one.

Lenders tend to view unsecured guarantor personal loans as riskier, which means they come with a higher interest rate than secured guarantor personal loans. Spend some time comparing the different types of loans on the market before you decide on a secured or unsecured personal loan.

For guarantors: Things to consider

Going guarantor for a loved one brings with it the emotional satisfaction of knowing you are helping them achieve their goals and take control of their finances.

Before you take on this financial responsibility, make sure you understand exactly what you’re getting into. Here are some things to consider:

  • If the borrower cannot make repayments, you will be responsible for paying back the loan, including interest and fees. If you are unable to pay it back, the lender may take the asset you nominated as security, such as your car or home, to cover the cost of the loan.
  • If things don’t work out, it could damage your relationship.
  • Going guarantor on a personal loan will appear on your credit record, even if the borrower repays the loan on time. This could affect your ability to secure loans and credit in the future.
  • If the borrower misses a payment, it could be listed as a default on your credit report. A low credit score makes it hard for you to take out a loan in the future.
  • Could going guarantor impact your own long-term financial goals, such as retirement?
  •  Are you better off gifting the money or loaning the funds directly to your loved one?

If you’ve decided to go ahead as guarantor, make sure you do your homework to safeguard against any nasty surprises down the track.

  • Take the time to understand the loan conditions, including the amount, interest rate, fees and loan term.
  • Consider the security of your loved one’s current income and employment. Are they at risk of defaulting?
  • Calculate how much you’d have to pay if the borrower defaulted and how this might impact your own financial health.

It’s always a good idea to seek your own legal and financial advice to make sure a guarantor personal loan is the right decision for all parties.

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