There are many lenders providing guarantor loans in Australia. Guarantor loans allow borrowers that are unable to borrow funds on their own accord, due to various reasons, to get a loan based upon the guarantee of an eligible guarantor.
For example, if you need a loan but are unable to secure one due to bad credit history, a lender may provide you with a loan if someone else, usually a family member or friend, can guarantee repayment of the loan in case you fail to make due repayments. This loan is called a guarantor loan, whereby your family member or friend would be called a guarantor while you will be called the borrower. Not all types of finance would be subject to a guarantor, for example many payday loans will not require this despite the borrower potentially having bad credit, but many types of finance do.
How Does Someone Guarantee A Loan?
Usually, as part of a guarantor loan, you will be asked to request a family member or friend to guarantee the loan’s repayment in case you are unable to do it, for whatever reason. If you are asked to act as a guarantor on a loan for someone, and you agree, then you would become legally liable to make loan repayments in case the borrower is unable to make repayments.
Since the guarantor offers additional security to the lender against the loan amount, borrowers with a below-average credit history are more likely to be accepted for a guarantor loan than one which does not require a guarantor.
If you offer to be a guarantor for someone, then you would need to mention this guarantee on all loan applications you make for the duration of the guarantor loan term. Some guarantor loans may also require you, the guarantor, to pledge a personal asset as collateral against the loan amount, and you cannot use this asset for another loan that you may require while the guarantor loan remains active.
Not all personal loans give borrowers the option to bring a guarantor and increase their chances of getting approved for the loan. The following loan types are generally available as guarantor loans:
- Secured Loans – a secured loan will require you or a guarantor to pledge a personal asset, usually a car, as security against the loan amount in exchange for a lower interest rate (compared to an unsecured loan). Car loans are also available as guarantor loans. Since secured loans present a lower risk to the lender, as it can sell the asset to recover the loan amount in case of default, the interest rate applied on the loan is highly competitive.
- Unsecured Loans – an unsecured guarantor loan, such as a short term loan, does not require an asset to be pledged against the loan amount, hence offering greater flexibility to both the borrower and the guarantor. However, the interest rate charged on an unsecured loan is usually higher compared to a guarantor loan.
Tip: You might not require a guarantor loan if you have an operational bank account, as your bank may allow you an overdraft account. This account provides a credit line up to a specific limit, with your history with the bank providing the guarantee that you will most likely repay the borrowed amount.
How Much Can I Borrow?
The maximum loan amount borrowers are allowed to take out as a guarantor loan depends on various factors.
Type of Loan
Usually, lenders specify the minimum and maximum amounts borrowers are allowed to take out with a personal loan. As long as a lender accepts your application with an eligible lender, you should be able to borrow up to the maximum limit. However, some lenders evaluate these limits based upon the borrower’s and guarantor’s individual characteristics, in which case you should know the minimum and maximum amount you are allowed to borrow after filing the initial loan application.
Purpose of the Loan
If you require a guarantor loan to buy a car or any other asset, then most lenders would allow you to borrow as much as the price of the asset. In some cases, this limit may be extended to cover additional charges applicable to the purchase of an asset, such as insurance.
Tip: If you need a guarantor loan to pay for holiday expenses, then the allowed borrowing limit may be lower than your requirement since such loans are usually unsecured and pose a greater risk to the lender.
Providers of guarantor loans conduct an affordability assessment of both the borrower and the guarantor to evaluate the risk of default. The lender is likely to only approve the loan amount up to the extent that both the borrower or guarantor are able to afford regular loan repayments for the entirety of the loan term.
Each lender has unique lending criteria, including the maximum amount it is likely to approve as a guarantor loan. Make sure you choose a lender that is likely to give out the loan amount you require.
Guarantor Loans Alternatives
If you are unable to secure a guarantor loan for any reason, and also have limited borrowing options due to a bad credit score, then you might want to consider alternative options. A great alternative could be risk-based loans. Many lenders in Australia evaluate loan applicants based upon the individual risk they pose and offer an individualized loan product with a loan amount limit and personalized interest rate.
Another option is peer-to-peer lenders. Since loans are funded by private investors through an online marketplace hosted by the lender, borrowers with a bad credit stand a good chance of securing a loan.
Tip: In both of the abovementioned alternatives, the interest rate charged on the loan is likely to be significantly higher compared to one charged on a guarantor loan.
Why does my guarantor receive the loan funds in their bank account after the loan is approved?
As a precautionary measure, guarantor loan providers deposit the loan funds in the guarantor’s bank account, and the guarantor is expected to transfer these funds to the borrower. This way, the guarantor accepts the receipt of funds and becomes obligated to repay the loan in case the borrower defaults.
I have been asked to become a guarantor. How will this impact my credit score?
In case the borrower becomes unable to make due loan repayments, and in case you, the guarantor, are also unable to make repayments, the loan will default and it will adversely impact your credit score.
Who can be my guarantor?
Usually, family members or friends act as a guarantor on a loan for the borrower.
I am a guarantor on a loan. Can I become a guarantor on another loan?
No, you can only act as a guarantor for one loan at a time.