The Australian car market is heating up, with new, affordable models arriving on our shores each week. But for many Australian students, a helping 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 when it comes to helping their child afford their first car, but others are taking a different path and opting to be the car loan guarantor for their child.
Having your parents act as a car loan guarantor may seem like a consequence-free way to secure your student car loan. But if you fail to meet your repayments and default on your loan, your parents may end up lumped with a big bill. This is because a guarantor agrees to take on the legal and financial responsibility for another person’s debts if it turns out they can’t afford to pay them.
So, before you have a relative or friend co-sign your student car loan as a guarantor, make sure you’re confident that they’re capable of repaying the money if it turns out you can’t.
RateCity’s car loan calculator can help you and your guarantor understand how much your student car loan’s repayments are going to be. But perhaps more importantly, make sure you and your guarantor understand each other’s responsibilities and rights.
Firstly, ensure that your student car loan’s guarantee is limited to a set time and amount, and have your guarantor get advice from a lawyer and/or financial adviser before signing any documents. Then ask the following questions:
- What is the amount that your guarantor would be required to repay if you’re unable to keep up with your student car loan repayments?
- What effect would paying this loan have on your guarantor’s existing loans and/or financial commitments?
- Why do you need a parent or other relative to act as guarantor?
- Do you have a poor credit history?
- Is your income secure?
If, after answering these questions, your potential car loan guarantor is feeling hesitant, there are alternative options to consider. Some parents choose to offer their adult child an interest-free loan to help them increase their borrowing capacity. Others prefer to help with a savings plan, where they match any money saved dollar-for-dollar.
There are several benefits for student borrowers to have someone act as car loan guarantor on their behalf, not least of which is the added security that appeals to lenders. But also, having someone co-sign or guarantee your loan can also help you qualify for low interest car loans. This is because most lending institutions typically offer these car loans to less risky borrowers, and a guarantor can help to reduce the level of risk involved in certain student car loans.
If you’re in the market for a student car loan and intend to get help from 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.