What is a guarantor personal loan?
Struggling to get approved for a personal loan? Adding a guarantor may strengthen your application. However, it can put them on the hook for the debt if you can’t repay.
Having a guarantor may improve your chances of getting approved for a personal loan.
- A guarantor may strengthen your personal loan application, but it won't guarantee approval.
- If you can't repay, your guarantor may be legally responsible for the debt.
- Guarantor arrangements can be secured or unsecured, which affects risks and interest rates.
- Being a guarantor can impact the guarantor's future borrowing.
If you are struggling to get approved for a personal loan because of a bad credit history, irregular income, or existing debts, adding a guarantor may strengthen your application. However, it won’t guarantee approval.
How a guarantor personal loan works
A guarantor personal loan is backed by a close relative or a friend who has agreed to be responsible for the loan repayments if you are suddenly unable to meet them.
A guarantor is typically someone in a strong financial position who acts as security for the loan, making it less risky for the lender to lend you money. As such, lenders may be more likely to approve your loan application.
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To be clear, a guarantor personal loan isn’t a separate loan product. Often, it’s a standard personal loan application supported by a guarantor agreement, where the lender assesses both the borrower and the guarantor under its own policies and criteria.
There are two main types of guarantor personal loans: secured and unsecured.
Secured guarantor personal loan
A secured personal loan usually uses an asset (e.g. a vehicle) being financed as collateral. Because there is security against the loan, it is less risky for the lender, which means the borrower could access lower interest rates. However, if you default on your loan repayments, the lender may be able to repossess and sell the collateral.
In some cases, a secured personal loan backed by a guarantor can be secured by an asset owned by the guarantor (e.g., their car) if the lender accepts that arrangement.
Unsecured guarantor personal loan
An unsecured personal loan does not require the borrower or the guarantor to pledge an asset as security. However, this doesn’t mean that you or the guarantor can get off scot-free if you default on the loan. If you are unable to meet repayments, the guarantor may be required to repay under the terms of the guarantee. If the debt remains unpaid, the lender can take legal action against you.
Because there is no security, unsecured loans (including unsecured guarantor arrangements) typically attract higher interest rates than secured loans.
In the market for a personal loan? The table below features unsecured personal loans with some of the lowest interest rates on the market.
| Lender | Car Loan | Interest Rate | Comparison Rate* | Monthly Repayment | Interest Type | Secured Type | Early Exit Fee | Ongoing Fee | Upfront Fee | Total Repayment | Early Repayment | Instant Approval | Online Application | Tags | Features | Link | Compare | Promoted Product | Disclosure |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
6.24% p.a. | 6.95% p.a. | $389 | Variable | Unsecured | $0 | $10 | $495 | $23,334 | |||||||||||
5.95% p.a. | 5.95% p.a. | $386 | Fixed | Unsecured | $0 | $0 | $0 | $23,171 | |||||||||||
5.76% p.a. | 5.76% p.a. | $384 | Fixed | Unsecured | $0 | $0 | $275 | $23,066 |
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Who can be a guarantor for a personal loan?
It is common for a guarantor to be a close relative (e.g. parents), but lenders’ policies vary, and it isn’t always a strict requirement. Some lenders may accept other relatives or even friends.
Eligibility criteria for guarantors generally include:
- Being over the age of 18
- Being an Australian citizen or permanent resident
- Having a stable income and the capacity to repay
- Having a good credit score
- Not being in financial hardship
Risks of being a guarantor on a personal loan
If you’re considering becoming a guarantor on a personal loan for someone, make sure you understand the risks. You’re taking on a big financial responsibility, so you must understand exactly what it is you’re signing up for.
Some risks of going guarantor on a personal loan include:
- You may have to pay back the entire debt (plus interest and fees) – If the borrower is unable to meet their loan repayments, the responsibility to pay back the loan falls to you.
- It could reduce your chances of getting a loan – If you apply for loans in the future, you have to tell the lender if there are any loans you’re currently a guarantor on. The lender may take that commitment into account and could decide not to lend to you, even if the borrower is making repayments.
- Your credit rating could be impacted – If you or the borrower defaults 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 have less ability to use the same asset as security for another loan – If you’ve already offered up an asset, like your car, as security for a loan guarantee, it may already be encumbered, and another lender may not accept it as collateral unless the existing security interest is discharged/released.
- It could negatively affect your relationship – Being a guarantor for someone is risky. 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. Additionally, if your relationship with the borrower suddenly changes, you will still have to make the repayments if they default. This is why it’s important to consider your relationship with the borrower before agreeing to be their guarantor.
Savings.com.au’s two cents
Agreeing to be a guarantor for someone else can be quite risky, so it’s important to weigh up the pros and cons before signing up for anything.
Before you sign a loan guarantee, ask the lender for a copy of the contract ahead of time and make sure you understand the details (the loan, plus interest, fees, and charges) and risks involved. If possible, consider guaranteeing a fixed amount rather than the full loan, so you know exactly how much you might have to repay if the borrower is unable to do so.
If you feel pressured to become a guarantor, treat that as a red flag and seek support. And if you think you were misled or unfairly pressured, or you didn’t understand what you were signing, get independent legal advice. In some circumstances, guarantees and credit contracts can be challenged or changed, and complaints may be escalated to external dispute resolution, such as AFCA (subject to eligibility rules and limits).