A personal loan gives you access to a fixed amount of money over a short-term period. If you need extra funds to pay for a holiday, car, renovations or to consolidate your credit card debt, a short-term loan can be a fast way to access extra cash.
Because you’re borrowing money from a bank or lender, you’ll need to meet certain eligibility criteria and income tests. If you’re self-employed, don’t have any assets or haven’t quite managed to save a deposit, you might still be able to apply for a personal loan with the help of a guarantor.
What is a guarantor personal loan?
When you apply for a personal loan, the bank or lender will use criteria which will assist them in working out your ability to pay back the loan. Lenders will look at your income, credit history, employment and assets. If you don’t meet one or some of these criteria and your personal loan application gets rejected, you could consider asking a family member or close friend to go guarantor.
If you don’t meet the asset or income criteria, you could be considered a risk in the eyes of the lender. By having a family member or friend act as a guarantor, they’re essentially co-signing the loan and agreeing to accept responsibility for the repayments if you default. A guarantor essentially acts as a type of security, making your personal loan less risky to the bank or lender.
Generally speaking, having a guarantor on your personal loan might help lower your interest rate because the loan is less risky. A lower interest rate means that the loan will cost you less which could help you pay it off faster.
What is a guarantor?
To a certain degree, all types of personal loans are a risk to the lender. Borrowers that have a bad credit history, are self-employed contractors or have an irregular income can find it hard to get a personal loan. This is where a guarantor can help. A guarantor is a third party, usually a family member or close friend who agrees to take on the risk when you take out a personal loan. Put simply, a guarantor is someone who guarantees your personal loan using their own money or assets. Because a guarantor is wearing the risk, if the borrower can’t make the repayments or defaults on the loan, the guarantor will assume financial responsibility for the money borrowed.
There are a few advantages for the borrower in having a guarantor on their loan. The main one is that a guarantor can help you meet the criteria for a personal loan you’d otherwise not be eligible for. The other potential upside is that because you’ve got an extra guarantee on your personal loan, the lender may see you as a lower risk and give you a better interest rate.
While it may feel like less responsibility for the borrower, having someone act as guarantor on a personal loan is a big responsibility, for both parties. Even if the borrower pays the loan back diligently, it will still appear on the guarantor's credit file which can affect their ability to secure credit cards and other loans in the future. Before you apply, it’s important that you do your research and make sure you can afford to pay back your personal loan.
Types of guarantor personal loans
When it comes to personal loans, having the option of a guarantor is generally a feature and not a separate type of personal loan. When you apply for a personal loan, you’ll have the option of choosing to have someone act as guarantor.
There are two main types of guarantor personal loans on the market; secured and unsecured.
If you’re looking to borrow funds and you don’t have any assets, your guarantor can use their car, property, jewellery, boat or caravan as security against the personal loan. The upside of securing an asset to a personal loan is that you get access to funds you might not have been able to borrow. Because the guarantor is nominating a valuable item as collateral, the loan becomes less risky and the interest rate could go down. The potential downside is that if you default on your loan repayments, the lender can seize the asset to recoup the money you owe.
If you opt for an unsecured guarantor personal loan, you or your guarantor are not required to secure an asset against the loan. This doesn’t mean you can borrow money and never pay it back – there are serious implications for both you and your guarantor if you default on an unsecured personal loan. Unsecured guarantor personal loans tend to be riskier which means that they have a higher interest rate.
Before you decide on a secured or unsecured personal loan, you should still do your research and compare the different types of guarantor personal loans on the market.
Who can go guarantor on a personal loan?
Depending on the size and type of personal loan, each lender has their own exact criteria over who can act as guarantor on a personal loan.
While some lenders might restrict the role of guarantor to a borrower's parents or immediate guardian, other lenders might be a little more relaxed and accept other relatives, siblings or grandparents. Although quite unusual, there are some lenders who will accept friends and colleagues as guarantors, as long as you can prove the relationship is strong.
Guarantors must meet the same lending criteria as other potential borrowers, specifically;
A guarantor must be over 18 and be a citizen or permanent resident of Australia. They must have a good credit rating and be able to prove their income and employment. Because they’re guaranteeing your personal loan, they must be able to show sufficient savings and have an asset they can put up as security against the personal loan.
Every lender has their own set of eligibility criteria. Before you apply for a guarantor personal loan, it’s important to compare the different loans, interest rates and options on the market.
Things you need to know as a guarantor
Acting as a guarantor on a loan can be a rewarding way to help a relative get ahead. But it’s also a big financial responsibility. So before you agree to guarantee, make sure you understand exactly how liable you are.
Consider how much you’d have to pay in a worst-case scenario and how this could potentially impact your other commitments. Get an understanding of how secure the borrower’s current income and employment are and assess the risk of them defaulting. It might be worthwhile getting your own legal and financial advice to make sure that going guarantor doesn’t affect your ability to get a loan down the track. Financial and legal responsibilities aside, going guarantor can impact relationships if things don’t work out. Consider how this might play out before you agree to anything.