Some form of security is usually required whenever you take out a new loan. With a guarantor loan, another person provides the deposit – the ‘guarantor.’ The guarantor signs an agreement to take financial responsibility for repaying the loan if you fail to make repayments yourself.
There are both upsides and downsides to a guarantor loan. For starters, the guarantor must have a good credit score and income history for you to be approved for the loan. This might exclude many potential guarantors from helping you out. However, if you cannot repay your loan, the burden falls on your guarantor - who will have to repay the loan for you. This can strain your relationship with them if they cannot do so because it may be seen as an act of betrayal or irresponsibility.
That's why it is essential to understand how guarantor personal loans work and the consequences of taking one out before deciding if it is a good option.
This blog will explain how guarantor loans work and the pros and cons of taking one out. We'll also share some tips on how to find a suitable guarantor for your loan and the steps you can take to ensure your loan is successful.
Who can act as a guarantor?
To act as a guarantor for a loan, a person must be at least 18 years old, be an Australian citizen, and possess enough financial resources to pay off the loan if the borrower defaults. A family member or even a close friend is the most likely to act as a guarantor. It's important to understand that the guarantor must be able to pay off the loan if you default, so it's essential to ensure they can do so.
It's essential to inform the guarantor about the risks associated with being a guarantor for a loan. One primary concern is the possibility of paying back the entire debt if the borrower can't make the repayments themselves. This could result in the repossession of assets used as security for the loan. Additionally, being a guarantor could affect their ability to get a loan in the future, as lenders may be hesitant to lend to someone already the guarantor of another loan.
That said, guarantor personal loans can be an excellent option for those who don't have the credit score or income to qualify for a loan on their own. In most cases, guarantor loans are successful, and the borrower can repay the loan without any issues. The key is to ensure that you have a suitable guarantor who understands the risks involved.
How much can you borrow with a guarantor?
The amount you can borrow with a guarantor loan varies from lender to lender, but generally speaking, you will be able to borrow more than you would with a regular loan. This is because the lender has the guarantor to fall back on should the borrower default on their payments. As a general guide, you may be able to borrow up to 105% of the property value when purchasing your first home. For investment properties, the loan amount could be up to 105% of the property's value. And for refinancing, you may be able to borrow up to 100% of the property's value. Keep in mind that some lenders may require additional criteria when borrowing more than $1 million.
Can someone be a guarantor on a personal loan?
Yes, someone can be a guarantor on a personal loan. The same criteria apply - they must be an Australian citizen over 18 years of age and have enough financial resources to pay off the loan if the borrower defaults.
If you want to take out a personal loan, you may be asked to have a guarantor co-sign the loan. This can be due to a low credit score or insufficient income, and having someone co-sign the loan may help you get approved.
Can I get a loan with bad credit and a guarantor?
If you have a low credit score, you may be able to get a loan with a guarantor. This is because the lender has another person to fall back on if you are unable to make your loan repayments. However, this doesn't mean that you will be able to borrow as much money as you would with good credit. You will likely still be subject to the same borrowing limits and loan criteria that other borrowers with bad credit are subject to. While a bad credit personal loan is still possible, by working on improving your credit score you can access even more enviable loan terms and a better interest rate.
Do any banks do guarantor loans?
Although many lenders, including the big banks, allow guarantors on loan applications, they may not clearly state this information. Approval for guarantors is often considered on a per-case basis. Online loan comparison sites can be a great starting point for finding a lender willing to consider guarantors for loans.
Tips for finding a suitable guarantor
Finding a suitable guarantor can be challenging, but there are some tips that you can keep in mind to help the process go more smoothly:
- Ensure that the guarantor is familiar with the loan terms and understands the risks involved.
- Make sure they have enough financial resources to cover the loan repayment in case of default.
- Make sure they have a good credit rating
- Discuss any potential implications for their credit score if you are unable to make your payments.
Different Types of Guarantor Loans
It's essential to understand how personal loans work with guarantors and the different types available. The guarantor personal loan you choose will depend on your circumstances and the amount you need to borrow. Two of the most common types of guarantor loans are unsecured and secured personal loans.
An unsecured guarantor loan is one where the borrower is not required to provide any collateral, such as a car or house. A secured personal loan backed by a guarantor works involves the borrower providing collateral as security for the loan. While unsecured loans are typically easier to obtain, secured loans may offer more competitive interest rates.
Pros and cons of a guarantor loan
- Guarantor loans can be a great way to access finance for those with bad credit or insufficient income.
- They provide an additional layer of security for lenders, which means you may be able to borrow more than you would with a regular loan.
- More competitive interest rates may be available with a secured guarantor loan.
- There is a risk that the guarantor may be liable for loan repayments if you default on your payments.
- The guarantor must also have a good credit score and be able to provide proof of sufficient income.
- Your relationship with the guarantor may be affected if you cannot make payments.
Whether it's an unsecured personal loan or a secured loan, guarantor loans can be a great option if you need to access finance but have limited options due to bad credit history or lack of income. However, it is essential to ensure that the guarantor understands the risks involved and can cover loan repayments if you cannot.
At Driva, we are passionate about empowering Australians with better access to financial solutions. That's why we have created our innovative loan platform to help people get the loan they need, even with bad credit and limited options. Once you have made your unique profile, we'll match you with the best loan options available so that you can secure the right loan. Whether you have the backing of a guarantor or not, Driva can help you find the right loan for your needs.