Guarantor Loan – Everything You Need To Know

A guarantor loan may be a way for consumers to secure credit that they wouldn’t be approved for otherwise. However, they carry with them significant risks. Monzi is here to explain it all.

Please note, certain ideas and products presented in this article may not be offered by Monzi nor the lenders we work with. This article presents only general information. Consider seeking professional financial, taxation, legal or other advice to check how the information and ideas presented on this website relate to your unique circumstances.

What does a guarantor on a loan mean?

A guarantor is an individual who guarantees a loan for somebody else. Specifically, they co-sign the loan agreement, so they are legally responsible for repaying the loan if the other person cannot.

An immediate family member often fills the role of a guarantor.

How does a guarantor loan work?

Guarantor loans work by providing an extra level of security for the lender. In other words, if the loanee fails to repay their debt, the guarantor takes over the loan. As a result, having a co-signer on your loan agreement might improve your chances of approval.

Once the loan is approved, the guarantor is not obliged to make any payments immediately. This only kicks in if the original loanee starts to fail on their repayments.

Who can be a guarantor for a loan?

Most lenders are willing to consider immediate family members as a guarantor, such as:

  • parents
  • adult children
  • spouse
  • de facto partners.

Some lenders may be able to consider other family members like cousins, uncles and aunts, grandparents or siblings in certain situations. Obviously, however, banks rarely consider work friends and associates to be the guarantor.

Ultimately, credit providers and banks may vary in their loan requirements. Moreover, your unique situation may also impact this.

In addition, there is a number of other criteria you will need to meet before being approved as the guarantor, including age, assets, location, equity etc.

Which banks offer guarantor loans?

Most banks will offer guarantor loans. While some may only accept your parents, other banks may be able to consider other close family members.

Each bank is a separate entity and may handle these loans differently. Moreover, each consumer has their own unique relationship with their family members. This may play influence what loans you’re eligible for.

Things to consider

If you are considering becoming a guarantor, or asking a family member to be one, consider the following.

  • Responsible. Whoever is guarantor may be responsible for the entire debt if the loanee cannot repay their debts. Moreover, the lender may repossess the car or home you put down as security if you are the guarantor.
  • Future loan applications. These loans may affect your ability to access credit in the future. Specifically, certain lenders may be unwilling to offer you credit if you are a guarantor on a loan, regardless of whether or not it’s being repaid.
  • Credit history. The lender will report the default to the credit reporting agency if the loan fails. Credit reporting agencies list this default on the reports of both the guarantor and the original loanee.
  • Strain on relationship. The human side of guaranteeing a loan; your relationship with your family members may become strained, especially if the loan is not being repaid.

Guarantor loan happy couple cooking dinner

Guarantor loan contracts

Before guaranteeing a loan, it is paramount you understand the details of your loan contract. In particular, pay close attention to the following:

  • Amount. Is the person guaranteeing the loan able to afford the repayments if the borrower cannot? Moreover, be aware that you may be able to guarantee a fixed amount, not the entire value of the loan.
  • Security. The lender may require the guarantor to attach one of their asses as security against the loan. Therefore, they may have their house or car repossessed if they cannot afford their loan.
  • Repayment term. Are you given enough time to repay your loan in full? Bear in mind, a longer repayment term may result in more manageable repayments, but also may incur more interest over time. The reverse is true for shorter terms.

Am I able to challenge a guarantor contract?

If you are a guarantor on a loan, you may be able to challenge your status if:

  • You were coerced through unreasonable pressure or fear.
  • You had a mental illness or disability when you agreed.
  • The guarantor was unable to get legal advice prior to signing and, as a result, did not understand the risks.
  • You feel your lender or broker was misleading.

If you are unsure whether or not you have grounds for a dispute, you should consider seeking free legal advice. Check out this MoneySmart article if you aren’t sure where to begin.

Benefits of a guarantor loan

Banks, in general, see guarantor loans as low-risk. As a result, having a guarantor generally lowers the cost of entry. In other words, the required deposit will be a smaller percentage of the total loan value.

In addition, lenders may not require you to take out Lenders Mortgage Insurance (LMI) if someone guarantees your application.

Ultimately, guaranteeing your loan often increases your chances of approval.

Risks of guaranteeing a loan

The major risk of guaranteeing a loan is that your parents or family members take on the responsibility, as well as all the associated risk. The lender may, as a result, take legal action against your guarantor.

In the worst-case scenario, the lender may repossess the person guaranteeing the loan’s home or vehicle. Furthermore, their credit history may also be affected, potentially limiting their ability to get loans in the future.

To conclude

As is evident, having a guarantor on a loan may make approval much easier. Despite this, there are significant risks involved for the person guaranteeing the loan. Therefore, put in serious consideration before applying.

Finally, be aware that you cannot apply for a guarantor loan through Monzi. This type of loan product is not on offer. Need a loan that can be spent like cash? We may be able to help with that.

We are a lender-finder service. Monzi aims to match you with a potential lender. You may even receive a 60 minute outcome.

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You won't use a penny to apply for our lender-finding service, but here's some costs you could expect from a lender

Loan amount

$300 - $2,000

Terms

12 months

Costs

20% upfront establishment fee

+ 4% monthly fee

Example

Loan Amount of $1,000 over 6 months repayable weekly (25 weekly repayments). $1,000 (Principal Amount) + $200 (20% Establishment Fee) + $240 (fees based on 4% per month over 25 weeks) = $1,440 total repayable in 25 weekly installments of $57.60.

Under the current legislation, most small personal loan providers don’t charge an annual interest rate (you’ll know this as an APR) %. The maximum you will be charged is a flat 20% Establishment Fee and a flat 4% Monthly Fee. The maximum comparison rate on loans between $300 and $2000 is 199.43%. This comparison rate is true only for the examples given and may not include all fees and charges. Different terms, fees or other loan amounts might result in a different comparison rate

Loan amount

$2,001 - $4,600

Terms

13 months

24 months

Costs

48% annual percantage rate

67.41% comparison rate p.a.

Example

Loan Amount of $3,000 over 18 months repayable weekly (78 weekly repayments). $3,000 (Principle Amount) + $400 (Establishment Fee) + $1,379.06 (reducing interest) = $4,779.06 total repayable over 18 months with weekly installments of $61.27.

The Interest Rate for Secured Medium Loans is 48%. The Typical Comparison Rate is 67.41% p.a. WARNING: This comparison rate is true only for the examples given and may not include all fees and charges. Different terms, fees or other loan amounts might result in a different comparison rate with the lender that finances your loan. Click here to see a worked example.

Loan amount

$5,000 - $10,000

Terms

13 months

24 months

Costs

21.24% annual percantage rate

48% comparison rate p.a.

Example

Loan Amount of $10,000 over 24 months repayable weekly (104 weekly repayments). $10,000 (Principle Amount) + $5,577.12 (Interest) = $15,577.12 total repayable over 24 months with weekly installments of $149.78.

The Interest Rate for Secured Large Amount Loans is 48%. Maximum Comparison Rate is 48% p.a. WARNING: This comparison rate is true only for the examples given and may not include all fees and charges. Different terms, fees or other loan amounts might result in a different comparison rate with the lender that finances your loan. Click here to see a worked example.