Guarantor Personal Loans: A Complete Guide
What are Guarantor Personal Loans and how do they work?
Guarantor personal loans are a simple and helpful way to borrow money when you need extra support. A trusted person, like a close family member or friend, agrees to step in and cover your payments if you can’t. This type of loan is great for people with poor credit or limited financial history. It gives lenders peace of mind, but it’s also a big responsibility for both you and your guarantor.
Guarantor personal loans are offered by banks and other financial institutions. While these loans can help borrowers obtain the funds, they come with serious responsibilities. For the guarantor, this means sharing the financial obligation and risk associated with the loan.
Imagine a scenario: you need a loan, but your credit score makes lenders uncertain about lending you money. In this situation, a guarantor can help—a trusted individual who agrees to take on the responsibility if you cannot make the repayments. This arrangement acts as a safety net for the lender.
For example, suppose you need $20,000 to purchase a car, but your credit history raises concerns. Your aunt might agree to be your guarantor. She will be legally responsible for covering your debt if you stop paying back the loan. This is a serious commitment, not just a casual courtesy.
Understanding the difference between a guarantor and a co-borrower is also important. Unlike co-borrowers, who have access to the loan funds, guarantors only ensure that you will pay the loan and step in if you stop paying. They do not receive any of the loan money themselves.
Who can be a guarantor for a personal loan?
Not everyone can be a guarantor. It requires financial stability and trust. Here’s what lenders typically look for:
Good credit history: Guarantors need a strong credit score. This shows they manage their money well and can be relied on. A good credit history gives lenders more confidence that the guarantor will actually cover costs if the borrower can’t meet their obligations.
Steady income: They must have regular income to prove they can cover repayments if needed. Lenders may also check if the guarantor’s income can comfortably handle the extra responsibility without causing financial strain.
Close relationship: Most lenders prefer guarantors to be family members or close friends. This ensures the guarantor and borrower trust each other, which is important for handling financial agreements that could last years.
Being a guarantor is a big responsibility and comes with risks:
It could impact your finances: If the borrower doesn’t pay, you’ll need to cover the loan. This might make it harder to get your own loan in the future, as the lender will see you as carrying extra financial responsibility.
It’s a long-term commitment: You remain responsible until the loan is repaid completely. This means you could be tied to the borrower’s financial decisions for years, even if your circumstances change.
It might affect your relationship: Money challenges can cause tension and impact your relationship with the borrower. If any problems arise, it can lead to awkward conversations, complicated situations, and potentially damage your personal relationships.
Before agreeing, take the time to understand the risks, talk openly with the borrower, and make sure you’re comfortable with the commitment. A bit of planning now can save a lot of trouble later.
Types of Guarantor Personal Loans
Secured Personal Loan with a Guarantor
A secured personal loan with a guarantor means the loan is backed by something valuable, like the item you’re buying or an asset the guarantor owns, such as their car.
If the borrower can’t repay the loan, the lender can sell the secured item to recover the money.
In this type of loan, even if the money is used for something else, the guarantor’s asset can still be used as security, adding extra protection for the lender.
Unsecured Personal Loan with a Guarantor
An unsecured personal loan with a guarantor doesn’t require any item or asset to be a security.
If the borrower cannot repay the loan, the guarantor becomes responsible for repaying it from their own funds. Lenders take on more risk without security, and to mitigate this risk and protect themselves against potential losses, lenders frequently charge higher interest rates on unsecured loans than those secured.
Where to get a Guarantor Personal Loan?
Quite a few Australian banks and loan providers offer guarantor personal loans. We've put together a list of aspects for you to consider when choosing a lender for a guarantor loan:
Look at interest rates and repayment terms: Interest rates can be different from one lender to another, so shopping around is essential. Focus on finding a rate that works best for your financial situation. Also, it is important that you understand the repayment terms to avoid surprises later. For example, some lenders might let you make payments that are easier to manage, while others have set less flexible repayment plans.
Check reviews for customer experiences: Reading reviews from other customers will help you understand how a lender operates. The most valuable feedback is about customer service. It will tell you a lot about how a lender appreciates its customers and give you an idea of how smooth an application process is and how potential issues are handled. A lender with consistently positive reviews will likely become your best choice.
Verify lender credibility and licensing: It's essential that you ensure that the lender's reputation is high and that it operates under Australian financial regulations. Licensed lenders follow strict guidelines that protect you as a borrower and your potential guarantor so you both feel confident in your financial journey.
Always shop around to find the right fit for your your individual requirements. A little effort of doing a research upfront will save money and stress in the long run.
Can I get a guarantor loan with bad credit?
Yes, you can get a guarantor loan even with poor credit, but it often depends on your specific situation. After all, having poor credit is one of the main reasons borrowers use guarantor loans. These loans are designed to help borrowers who may not meet traditional lending criteria by leveraging the financial stability of a guarantor.
The approval process will depend on the lender's policies. Your credit score is still important, but the guarantor's financial profile plays the leading role in your chances of approval.
A few things to keep in mind:
Even with a guarantor, it's crucial to demonstrate that you are capable of repaying the loan. You will still have to provide details about your current income and budget.
If approved, use the loan as an opportunity to rebuild your financial reputation. Paying back the loan on time will help improve your credit score, making it much easier to borrow money later - even without a guarantor.
Pros and Cons of a Guarantor Personal Loan
Guarantor personal loans can be helpful, but they have upsides and downsides. Here's a simple breakdown to help you decide if it's the right choice:
Pros:
Easier approval: If you're struggling to get a loan because of poor credit or low income, having a guarantor can improve your chances. Lenders feel more confident knowing that there is additional support behind you.
Better borrowing options: A guarantor might help you access higher loan amounts or lower interest rates than you'd get on your own.
Opportunity to build credit: By repaying your loan timely, you can improve your credit score and increase your options to borrow in future.
Cons:
Asking someone for help: You need to find someone willing to take on the responsibility, which can feel uncomfortable. It's a big favour to ask, and not everyone will say yes.
Risks for the guarantor: If you can't make your repayments, the guarantor has to cover them. This can affect their finances and even damage their credit score.
Strained relationships: Even if you're close friends or relatives, money topics can cause tension between you and the guarantor, especially if you face difficulties.
Before choosing this type of loan, weigh the pros and cons carefully. Consider whether you can commit to making repayments and the impact it might have on your relationship with the guarantor. It's a decision that requires trust and open communication.
Credit24: Get a Personal Loan without a guarantor
At Credit24, we do not provide guarantor personal loans.
Unsecured loans up to $10,000: Whether you need a small loan or something larger, Credit24 provides flexible amounts to suit your needs.
Apply with bad credit: Even if your credit history isn’t perfect, you can still apply.
Fully online process: Complete your application online, saving you time and effort.
Fast approval and payouts: If approved during business hours, you could receive your funds the same day.*
Credit24 offers a stress-free, reliable, and secure way to get extra funds when you need them most.
