Going guarantor: the good, the bad and the ugly



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What is a guarantor on a car loan?

A guarantor on a car loan is a third party, usually a parent, relative or friend, who guarantees to meet the repayments of a loan for the purchase of a car, if the borrower/owner of the car defaults on the loan.

Guarantor car loans can be useful for people who would otherwise struggle in being accepted for credit to purchase a vehicle. These people may include people with bad credit, students and young people who may have no credit history, and some pensioners.

Many lenders offer guarantor car loans, guarantor personal loans and guarantor home loans, because of the significantly reduced risk to the lender.

Getting a loan with a guarantor

Getting a guarantor loan can be helpful for both increasing your chances of being accepted for a loan and potentially enabling you to secure a lower rate than you would have otherwise been offered, based on your circumstances, such as having bad credit history or no credit score. 

To be accepted as a guarantor the third party must be someone with very good/excellent credit. They may have to put an asset of theirs against the loan, such as their car or home equity.

It is important for both parties to really consider the risks involved before signing the dotted line of a guarantor car loan. These will be:

  • What is your financial situation like?
  • How secure is your current income?
  • Are you likely to default on the loan?
  • How much will the guarantor be required to repay if you default?
  • How will this repayment impact the guarantor’s ability to service their existing financial commitments?
  • Will your relationship be affected if the situation sours?

Where can I get a guarantor car loan?

There are multiple lenders who are willing to provide loans secured by guarantors. If someone is willing to go guarantor for you and they meet the requirements set out by lenders, you can apply for guarantor finance online, over the phone, or in person.

Do banks do guarantor loans?

Yes, some banks will be willing to provide guarantor loans, including Commonwealth Bank, NAB, Westpac and ANZ. You ought to bear in mind though that these larger banks, because of their monopoly of the market, tend to have higher interest rates than the smaller lenders.

Smaller loan companies and credit unions tend to be more competitive in their battle for your business. There are plenty of lenders willing to lend to people with bad credit or no credit history who have willing guarantors.  

Pros and cons of guarantor loans

Pros

 

  • You are more likely to be approved for a loan with a guarantor if you have bad credit or no credit.
  • You may be more likely to be able to secure a car loan with a lower interest rate.
  • You may be more inclined to meet your repayments, because an important relationship may be at risk.
Cons
  • You may find that you have taken out a loan that you cannot afford, because you were accepted on the grounds of a guarantor.
  • If you default on your loan and don’t meet your repayments, you could potentially ruin your relationship.

 

     

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    Anyone who knows your circumstances and trusts you to meet your repayments is someone who could potentially go guarantor for you on a car loan, providing that they have an excellent credit history and/or are a home owner.

    Parents are the most likely to be accepted by lenders as guarantors, but immediate family such as grandparents, adult children, siblings and de facto partners are also accepted. If you want a friend of colleague to go guarantor for you it is possible but may require a specialist lender and may incur a premium fee.

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