What is a guarantor personal loan?

For whatever reason, you may be struggling to get approval for a personal loan. It could be because you’ve got bad credit history, you don’t have stable income or you’ve already got a few outstanding debts.

If this is the case, you could use a guarantor to improve your chances of being approved for a personal loan.

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How does a guarantor personal loan work?

A guarantor personal loan is backed by a family member or friend who has agreed to be responsible for the loan repayments if you are suddenly unable to make them. A guarantor basically acts as security for the loan, making it less risky for the lender to lend you money. Because of this, lenders may be more likely to approve your loan application.

There are two main types of guarantor personal loans: secured and unsecured.

A secured guarantor loan involves the guarantor putting up an asset, such as their car, as security against the loan. Because there is an asset being used as security against the loan, the loan is less risky for the lender which means you could get access to lower interest rates. The downside is that if you default on your loan repayments, the lender could seize the guarantor's asset to pay down the debt.

An unsecured guarantor loan means that the guarantor does not need to offer up an asset as security for the loan. This doesn’t mean that you or the guarantor can just get off scot-free if you default on the loan. If you are unable to make the loan repayments, the guarantor will have to step in and make your repayments. If both you and the guarantor default on the loan, the lender can take legal action against you. Because of the added risk, unsecured guarantor loans often attract a higher interest rate.

Who can be a guarantor for a personal loan?

Lenders have their own specific criteria as for who can be guarantor on a personal loan but generally speaking, most lenders will only allow a borrower’s parents or immediate guardian to be guarantor. Other lenders may accept other relatives, or even friends.

Guarantors have to meet the same eligibility criteria as borrowers, which generally includes:

• Being over the age of 18

• Being an Australian citizen or permanent resident

• Having stable income and employment

• Having a good credit score

• Not being in financial hardship

• Being able to prove that you have savings or an asset to use as security against the loan

What are the risks of going guarantor on a personal loan?

If you’re considering going guarantor on a personal loan for someone, make sure you understand the risks. You’re taking on a big financial responsibility, so it’s important you understand exactly what it is you’re signing up for.

Some risks of going guarantor on a personal loan includes:

• You may have to pay back the entire debt: If the borrower is unable to make their loan repayments, the responsibility to pay back the loan falls to you. If you’ve put up an asset to be used as security against the loan, such as your car, the lender can repossess this if you can’t make the repayments.

• It could prevent you from getting a loan: If you want to apply for loans in the future, you have to tell the lender if there are any loans you’re currently a guarantor on. This can impact your chances of being approved for future loans, even if the loan you’re a guarantor on is being repaid by the borrower.

• Your credit rating could be impacted: If you or the borrower default on the loan, this will be marked on your credit file, which could also impact your ability to take out a loan in the future.

• You may not be able to use the asset as security for another loan: If you’ve already offered up an asset like your car as security for the loan, you may not be able to use that same asset as security for other loans.

• It could damage your relationship: Being a guarantor for someone is risky and if they default on their loan and you’re forced to step in and make the repayments, it could damage your relationship with the borrower. Plus, if your relationship with the borrower suddenly changes, you will still have to make the repayments if they default. This is why it’s really important to consider your relationship with the borrower before agreeing to be their guarantor.

Savings.com.au’s two cents

Agreeing to be guarantor for someone else can be quite risky, so it’s important to weigh up the pros and cons before you sign up.

Before you sign a loan guarantee, make sure you get a copy of the contract from the lender beforehand and that you understand the details and risks involved. It can be better to only guarantee a fixed amount rather than the total loan amount so you know exactly how much you might have to repay if the borrower is unable to do so.

Being a guarantor doesn’t always work out and in some cases, you may even be able to challenge a loan contract if you believe you were tricked, misled or pressured into becoming a guarantor, if you had a mental illness or disability when you agreed to become a guarantor, or if you didn’t fully understand the risks involved or the amount you were agreeing to be guarantor for. If this is the case, you can seek free legal advice.

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