If you’re in the market for a personal loan, whether to finance a business, consolidate your debts, or pay for that dream holiday, your lender will usually require some kind of security. If you can’t afford a deposit, or don’t have an asset available to secure your loan, you may still be able to apply for a personal loan with the help of a guarantor.
What is a guarantor?
A guarantor is a third party who volunteers to cover the risk involved when you borrow money from a lender – that is to say, they guarantee the loan.
If the borrower doesn’t keep up with the repayments, the responsibility of paying back the loan to the lender will fall on the guarantor.
Why do borrowers use guarantors?
Every personal loan involves some degree of risk for the lender – what if the borrower takes their money and never pays it back? Most lenders require borrowers to pay a deposit to secure their personal loan and protect the lender’s finances. Alternatively, some lenders allow a valuable asset, such as a car or piece of property, to be used as security for a personal loan – if the borrower defaults on their repayments, the lender will repossess and sell the asset to get their money back.
If a borrower wants a personal loan, but can’t afford a deposit or provide a suitable security asset, a guarantor may be able to step in and guarantee the loan with their own money or assets.
A guarantor can also be useful to self-employed contractors or similar borrowers who lack a stable and consistent income. Support from a guarantor can often help these non-conforming borrowers to access personal loan options that they would otherwise be ineligible for.
Finally, some lenders will allow borrowers with poor credit histories to apply for personal loans with the help of a guarantor.
Who can be a guarantor?
The exact requirements for who can and can’t be a guarantor vary by lender.
Many banks will only accept a borrower’s parents as their guarantor. Other lenders will accept any close relative, such as grandparents, siblings or spouses.
Some lenders will also accept friends and work colleagues as guarantors, but this is relatively rare, as most banks want to be confident in the strong relationship between the guarantor and the borrower.
Otherwise, a guarantor must typically fulfil the same lending criteria as a borrower would when applying for a loan, such as:
- Being over 18
- Being an Australian citizen/permanent resident with an appropriate visa
- Good credit rating
- Regular income (self-funded retirees can also be guarantors in some cases)
- Sufficient savings and/or equity in an asset to guarantee the loan
Because every lender has different eligibility criteria for guarantors, be sure to check and confirm what’s required before submitting a guarantor personal loan application.
Benefits of borrowing with a guarantor
A guarantor can often help you qualify for personal loans you’d otherwise be ineligible for, giving you access to the funds you require.
Support from a guarantor can also help you enjoy lower interest rates. Lenders base the interest they charge on the level of risk involved when providing a loan. The more security a borrower can provide, the lower the level of risk to the lender, and the lower the interest rate they’re likely to charge.
By securing a personal loan with a guarantor, a borrower can make their loan less risky to their lender, and thus enjoy the benefits of a better interest rate than they’d normally get.
With lower personal loan interest rates, borrowers may be able to afford extra repayments on their personal loan. This can pay off more of the loan’s principal faster, which can help borrowers to save on interest charges, or even get out of debt ahead of schedule.
What to watch out for when borrowing with a guarantor
When borrowing money with the help of a guarantor, much of the financial risk that would typically be the borrower’s responsibility is instead shouldered by the guarantor.
If the borrower doesn’t keep up with their loan repayments, the guarantor’s deposit or asset may be seized by the lender to cover the losses, and the guarantor will be responsible for paying back any remaining money.
Also, because borrowing with the help of a guarantor means fewer financial responsibilities for the borrower, it can be tempting to take out more loans, borrow more money, and get into more debt – all behaviours that could lead to more financial trouble down the track.
Even if the borrower makes responsible and diligent progress towards repaying their personal loan, a guarantor’s finances can still be affected. The borrower’s personal loan will be included on the guarantor’s credit report, which could limit the guarantor’s ability to apply for credit or loans of their own. And if the borrower does default on their personal loan, this will also be recorded on the guarantor’s credit history, which could lead to a bad credit rating.
Checklist for a future guarantor
If you’re asked to be a guarantor for a personal loan, be sure to carefully consider whether you’re financially prepared for this commitment.
Before signing the dotted line, you should find out:
- How much may you be required to repay?
- How would this affect your other financial commitments?
- Is the borrower likely to default?
- How secure is the borrower’s current income?
- Will your relationship be affected if the situation sours?
Whatever your borrowing needs or financial circumstances, one of the easiest ways to find guarantor personal loans to suit you is to compare the options at RateCity. By simply entering a few details, including your desired loan amount and optimal loan term, you can compare rates from a variety of bank and non-bank lenders.
RateCity will help you to compare personal loan rates, determine how much your repayments would be on selected loans, and how much you would be paying in fees. Find guarantor personal loans at RateCity and apply for the loan that suits your needs.