Loan Guarantor: What Does It Mean & How Does It Work?

If you're having trouble getting a loan approved, or want to help someone get a loan approved, asking for a loan guarantor (or going guarantor on a loan) can be a great way to get the approval you seek.

In this article, we'll look at loan guarantors and how they can affect the loan process.

What Is A Loan Guarantor?

A loan guarantor is, simply put, someone you nominate to repay your loan using their equity in the event that you're unable to fulfil your repayment obligations. Going guarantor on a loan can be a way to get a loan approved if a lender is hesitant, such as in the case of bad or no credit, since the lender will have a security net in the form of the guarantor.

Types of Guarantees

There are numerous types of loan guarantors known as guarantees. You'll need to find the right one to help you secure your loan, depending on your financial situation and the loan you intend to take out. They include:

  • Security guarantee. In this case, the guarantor, also known as an "equity guarantor", uses their assets as a form of security for the loan in question. This could be a vehicle or other item of value matching the final price of the loan.
  • Security and income guarantee. Guarantors of this type are usually parents who are looking to help their child who is a student and does not have sufficient income to repay a loan. In this case, the lender will use the parents' chosen form of security while relying on their income to prove that the loan can be repaid.
  • Family guarantee. As the name implies, in this situation the guarantor would be directly related to the individual applying for the loan, with their income or collateral acting as a form of security. They may be a parent, grandparent, spouse, or even de facto partner.
  • Limited guarantee. In this instance, the guarantor would agree to guarantee only a part of the loan.

Who Can be A Guarantor?

The specific requirements of a guarantor will depend on the lender's criteria, but in general, a guarantor should:

  • Be an Australian citizen or a permanent resident
  • Be aged 18 or over, but below the age of 65
  • Have equity in the form of a car, property, etc.
  • Have a good credit rating.

How Does Going Guarantor On A Loan Work?

Going guarantor on a loan works by offering up a form of collateral – whether it be property, income, or a similar asset – in order to reduce the liability of the borrower. This means that, if the borrower is unable to repay the loan, the guarantor steps in and takes over repaying it. In a worst case scenario, if the original borrower cannot repay the loan, and the guarantor is also unable to repay the loan, the lender will be able to sell the agreed upon collateral in order to break even.

Being a guarantor does not automatically give you special rights over the contents of the loan. If the loan is being used to purchase a car for example, you won't have any ownership over the car – you'll just be required to get money back to the lender.

Risks Of Going Guarantor

There are a number of risks associated with becoming a loan guarantor, and they all need to be carefully considered. For example, you should understand that your guarantor is ultimately responsible for your loan if you are unable to make repayments – if you cannot repay your loan, it's possible that your guarantor's property will become the lender's.

If you fail to repay your loan, you could also negatively impact your guarantor's credit score, but beyond this, it can be damaging on a mental level. Money stress can ruin personal relationships, so you could actually end up losing family or friends over a loan.

Benefits of Getting a Guarantor Loan

Guarantor loans carry with them several benefits. These include:

  • Faster loan approval.
  • Access to better loans with more favourable rates.
  • The ability to better consolidate outstanding debts.
  • Limiting the size of the guarantee.

Unsure if a guarantor is right for you? Talk to us today to find out how Sunshine Loans can help you with a small personal loan of up to $2,000, or use out online application form to apply and receive your money in less than 24 hours.