Guarantor personal loans

How do guarantor personal loans work?

A guarantor is someone in a strong financial position who is willing to support your personal loan application. The guarantor is usually a family member, and they essentially put themselves forward to pay your loan if you can't.

If you apply for a personal loan with a guarantor then this increases your chances of getting the loan approved.

You might be able to borrow more or secure a lower interest rate if you apply with a guarantor.

But if you can't repay the personal loan, your guarantor may be forced to.

Risks and benefits of getting a personal loan with a guarantor

Entering into a guarantor agreement for a loan is never without risk, but most of the risk really lies on the guarantor. The guarantor should seek legal advice and understand exactly what kind of arrangement they are entering into.

For both parties, it's important to get legal advice before signing a loan contract. And it's important to understand that entering into a guarantor agreement can put strain on your relationship if the borrower can't repay the loan.

Questions to ask yourself before guaranteeing a personal loan

• Am I confident the borrower can repay the loan?
• Can I afford to repay this loan if the borrower can't? Will it put me in financial hardship?
• Am I willing to risk an asset if the borrower can't repay the loan?
• Have I checked every detail of the loan contract and guarantor agreement? Have I sought legal advice?
• Have I considered alternative ways to help the borrower?

Questions to ask yourself before borrowing money with a guarantor

• Am I risking damaging an important relationship if things go wrong?
• Have I considered other ways to get this money outside of a personal loan? Do I really need this loan?
• Am I confident I can repay this loan?

What types of personal loans can I get with a guarantor?

There are no specific guarantor loan products. A guarantor arrangement is something lenders typically offer on their personal loan products and assess on a case by case basis.

Every lender is different but it's possible to get most personal loan types with a guarantor:

Secured guarantor loans

With a secured personal loan the borrower typically offers an asset (usually a car) as security. But if a guarantor is willing to offer something as security instead you may be able to get a secured loan with a guarantor. Secured personal loans have lower rates than unsecured loans.

Unsecured guarantor loans.

An unsecured personal loan has no asset attached to it. These loans are more flexible and often easier to get but do have higher rates. You could get an unsecured loan with a guarantor. The guarantor would not have to put a car or property up as security but they'd still be liable to repay the loan if you can't.

How much can I borrow with a guarantor?

The amount you're able to borrow with a guarantor depends on your financial situation, your credit score, the type of loan you're applying for, your guarantor's financial situation and the lender's own lending criteria.

In general, having a guarantor on your loan makes it easier to borrow more than you could alone. But the lender still needs to be satisfied that you can afford the repayments.

Use a personal loan calculator to check you can afford the loan's repayments. Be sure to factor in both the interest rate and loan fees.

Who can be a guarantor?

A guarantor for a loan is usually a parent or family member. Some lenders may accept a friend as a guarantor but check this before applying.

For most lenders a personal loan guarantor needs to:

• Be 18 or over
• Be an Australian citizen or permanent resident
• Have a stable income and employment
• Have a good credit score
• Not be in financial hardship

If you're applying for a secured personal loan the guarantor needs to provide a suitable asset. For most lenders this is usually a car that is under 7 years old and registered in the guarantor's name.

But some lenders may accept other assets as security.

Who offers guarantor loans?

While most lenders, from big banks to online lenders, accept guarantors on personal loan applications, they aren't always upfront about it.

For many lenders, guarantors are accepted on a case by case basis. It's worth checking if a lender allows guarantors before submitting a full application.

How do I become a guarantor?

To become a guarantor you will need to:

• Meet the lender's eligibility requirements.
• Sign a loan contract.
• Provide extensive details to the lender.

You should also seek legal advice before signing a guarantor agreement.

What information does a guarantor need to provide?

Every lender asks for different information, but most of them require very detailed information about your personal and financial circumstances.

This includes:

• Personal information like your name, address and driver's license.
• Employment details.
• Information about all your debts, assets and liabilities, including properties and any outstanding loans.
• Details of your average monthly spending.

Can a guarantor be removed from a loan?

There are a few ways to get out of a guarantor arrangement.

1. You can opt out of the guarantor arrangement before the loan contract is signed and the loan has been drawn down.
2. You can challenge the loan contract and may be able to get out of the arrangement if there is a discrepancy in the contract, you were pressured into the arrangement or you have been misled in some other way.
3. Once the loan is approved and the borrower is making repayments it's much harder to be removed from the loan as the guarantor. You could pay out the remaining loan amount to end the arrangement or suggest a new arrangement. But the lender would need to approve this.

Can I limit my exposure as a guarantor?

You may be able to guarantee part of the loan rather than the entire amount. By limiting the amount of the loan you're guaranteeing, you can support the borrower's loan application and then be free once the borrower has paid back an agreed amount.

The lender has to agree to this arrangement, and it might not be possible on smaller loan amounts.

Alternatives to a guarantor loan

Apply for a risk-based personal loan from another lender

If a bank turned you down for a personal loan, a smaller lender with risk-based pricing might lend to you without a guarantor. These lenders set loan rates based on a borrower's risk profile and creditworthiness.

This means you have a better chance of getting a loan on your own. But you will end up with a higher interest rate.

Get a peer-to-peer loan

In a similar way, peer-to-peer loans match borrowers to sources of finance and they also have risk-based pricing. Again, you'll pay a higher rate but your chances of approval are probably higher.

Improve your position as a borrower

If you have the option to wait before applying for credit, you might be better off improving your credit score and applying for a loan without a guarantor.

You could also increase your chances of getting a loan by borrowing a smaller amount.

Frequently asked questions

• Can I get a guarantor loan if I have bad credit?

  Having bad credit is a common reason borrowers seek out a guarantor when applying for a personal loan.

  If both you and your guarantor have bad credit scores you'll struggle to get the loan approved.

  You could also look at a personal loan for bad credit borrowers.

• What checks are done on a guarantor?

  Lenders require ID to establish the guarantor is an Australian citizen or resident over the age of 18.

  Then the lender checks the guarantor's credit report in the same way it checks the applicant's credit report. It also assesses the guarantor's ability to repay the personal loan. This includes looking at their income and spending, plus their current outstanding debts.

  If the loan is secured by an asset provided by the guarantor, then the lender will also examine the asset to make sure it's suitable collateral.

• What do I do if I can't get a guarantor?

  If you can't find someone to guarantee your loan then you could:

  1. Look for a loan from a different lender (who may charge you a higher interest rate).
  2. Put off the loan application until your credit and financial position are stronger.
  3. Consider borrowing a smaller amount of money.

• Why can't I get a guarantor loan?

  Having a guarantor doesn't always mean you can definitely get a loan approved. If your credit is in really bad shape, or both you and your would-be guarantor are not ideal borrowers, your application may be rejected.

  You might get rejected if you're trying to borrow too much relative to your income and expenses.

• How easy is it to get a guarantor loan?

  Assuming you're borrowing a reasonable amount and your guarantor has a good credit history and/or an asset to back up your application, having a guarantor should make it easier for you to get the loan approved.

• Do guarantor loans affect the cost of the loan?

  Having a guarantor attached to your loan won't make the loan more expensive in terms of the rate and fees. In fact, you can possibly get a better interest rate because having a guarantor makes you a safer borrower from the lender's point of view.

To make sure you get accurate and helpful information, this guide has been reviewed by Rebecca Pike, a member of Finder's Editorial Review Board.

Written by

Richard Whitten

Editor

Richard Whitten is a money editor at Finder, and has been covering home loans, property and personal finance for 6+ years. He has written for Yahoo Finance, Money Magazine and Homely; and has appeared on various radio shows nationwide. He holds a Certificate IV in mortgage broking and finance (RG 206), a Tier 1 Generic Knowledge certification and a Tier 2 General Advice Deposit Products (RG 146) certification. See full bio

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Richard has written 557 Finder guides across topics including:

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Co-written by

Rebecca Pike

Senior writer

Rebecca Pike is Finder's senior writer for money. She joined Finder after almost four years writing for business publications in the mortgage and finance industry, including three years as editor of Mortgage Professional Australia. She regularly appears as a money expert on programs like Sunrise and Today, as well as across radio and newspapers. She also holds ASIC-recognised certifications in Tier 1 Generic Knowledge and Tier 2 General Advice Deposit Products. See full bio

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