The Australian car market is heating up with new affordable models arriving on our shores. But for most Australian students, a hand from mum and dad is needed to secure their first student car loan.
For some parents an interest-free car loan is the way to go, but others are opting to be the car loan guarantor.
Acting as a car loan guarantor may seem like a meaningless role to help someone secure a loan. But if the borrower fails to meet repayments and defaults on the loan, you may be lumped with a big bill.
That’s because as a guarantor you’re agreeing to take on legal and financial responsibility for another person’s debts. So before you co-sign a relative or friend’s car loan, be sure to know that they are capable of repaying the money. RateCity’s car loan calculator can help you understand how much this is going to be. But more importantly, be sure that you understand your responsibility and rights.
Firstly, ensure that your guarantee is limited to a set time and amount and get advice from a lawyer and financial adviser before you sign any documents. Then ask yourself the following questions:
- What it the amount that you’d be required to repay?
- Would paying this loan affect your existing loans or financial commitments?
- What is the borrower’s reason for needing you to act as guarantor?
- Do they have a poor credit history?
- Is the borrower’s income secure?
If after answering these questions you’re feeling hesitant about being a car loan guarantor, there are alternative options. Some parents choose to offer their adult child an interest-free loan to help them increase their borrowing capacity. Others prefer to help out with a savings plan – where they match dollar-for-dollar any money saved.
There are a number of benefits for the borrower to have someone act as guarantor on their behalf. Not least of which is the added security that appeals to lenders. But also, having someone co-sign your loan can also attract low interest car loans. That’s because they are typically considered to be less risky borrowers in the mind of most institutions.
If you’re in the market for a car loan and intend to be a car loan guarantor, compare car loans online at RateCity to find a competitive rate. You can also get information from the Car Loan Guide, as well as use great tools like the Car Loan Calculator.