Personal Loan Guarantors 101

13/07/2020
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As part of your loan application, a lender might ask you to provide a ‘guarantor’. If you’re wondering what that is, why you need one and who can act as one, you’ve come to the right place.

 

Read more: What’s a good credit score and why does it matter?

 

WHAT IS A GUARANTOR?

A guarantor is someone who promises to pay someone else’s debt on their behalf in the event the borrower isn’t able to do it personally. If the borrower starts missing repayments on their loan, their guarantor(s) are required to cover the shortfall. This could mean making the repayments themselves, or having their personal assets recovered by the lender (cars, property, etc).

Example: Julie is having trouble getting a home loan because she has bad credit. She asks her parents to act as guarantors to increase her chances of having her application accepted. Her parents, being financially secure and trusting their daughter to cover the payments, agree and become the guarantors of her mortgage. If Julie isn’t able to make her repayments, her parents will need to make them instead.

It’s also important to remember the difference between a co-borrower and a guarantor. A co-borrower helps to make regular repayments from day 1, and it’s partially their loan. A guarantor is only contacted as a last resort if the original borrower can’t or doesn’t pay. Don’t get these two confused!

 

WHAT ARE THE BENEFITS OF HAVING A GUARANTOR?

If you’re self-employed, have bad credit or don’t have a big deposit (for a home loan), you might have trouble getting a loan. Having a guarantor improves your chances of acceptance. This is because having a guarantor means the lender has more assurance that the debt will be repaid in time and in full, either by you or your guarantor(s).

With a guarantor, you can borrow more easily even if you:

  • Are self-employed
  • Have bad credit
  • Have unstable income
  • Want to borrow a significant amount
  • Don’t have a 20% deposit (for a home loan)

Remember, responsible lenders will still need to make sure you are reasonably able to afford and pay for your loan yourself. Having a guarantor makes it easier, but it doesn’t mean a guaranteed successful application.

 

WHO CAN BE A GUARANTOR?

Because the guarantor(s) may need to cover the borrower’s debt themselves, responsible lenders will expect them to be in a reasonable financial position. If a guarantor has lots of equity in their home, a good income, or otherwise could reasonably service the debt, then they’re golden. If not, the guarantee they provide might not be strong enough.

Common choices for guarantors include:

  • Parents
  • Relatives
  • Close friends
  • Business partners

If you’ve been asked to be a guarantor, remember that there are risks involved. If the borrower doesn’t make the repayments, you will become responsible for paying their debt, and that can mean:

  • Lost assets (cash, car, property)
  • Damage to your credit score
  • Owing on future debt (in the case of a top up)

It’s very important for a borrower and a potential guarantor to discuss the game plan for the loan. Consider:

  • How the borrower plans to pay for the loan
  • When the borrower expects to have the loan paid off
  • What the borrower will do if they can’t make a repayment (pro-tip, they should get in touch with their lender ASAP!)

 

WHAT LOANS CAN USE A GUARANTOR?

You can have a guarantor on:

  • Car loans
  • Personal loans
  • Home loans
  • Business loans

Your lender may ask for a guarantor depending on the value of the loan and the financial status of the original borrower. It isn’t limited by loan type.

 

WHAT ARE THE ALTERNATIVES TO A GUARANTOR?

If a guarantor isn’t an option, there are alternatives. Your lender will be able to talk you through which ones are suitable for you, but they normally include:

  • Providing more security personally. Equity in a property or a cash deposit are good starting points.
  • Obtaining a better credit rating. This can take a while but there are some things you can do immediately. Read our guide to credit scores for more.
  • Negotiating a lower amount to borrow.
  • Co-borrowing alongside someone else such as a partner, relative or close friend.

Some potential guarantors may also be more comfortable simply gifting the cash you need for a deposit (or providing the loan themselves).

 

SUMMARY

  • A guarantor promises to pay a debt on behalf of the borrower should they be unable to do it themselves.
  • This makes it easier for a borrower to get a loan, but it also has risks for the guarantor, including the potential for repossessions to recover the costs of the loan.
  • Parents, relatives, friends and business partners are common choices for guarantors, but it’s important that they are in a good financial position themselves to be considered an adequate guarantor.
  • Alternatives to a guarantor include increased security, working towards a better credit rating, borrowing a smaller amount or making a joint application with someone else.

Got a guarantor in mind? Begin your loan application with Avanti Finance online.

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