Find out more about guarantor personal loans

When you apply for a personal loan, the lender will assess your ability to pay back the loan, looking at your income, credit history, employment, and assets. If you don’t meet the lending criteria, or if your personal loan application gets rejected, this is where a guarantor may help.

By having a family member or friend act as a guarantor, they’re essentially co-signing the loan and agreeing to accept responsibility for the repayments if you default. A guarantor basically acts as a type of security, making it less risky for your lender to loan you funds.

Generally speaking, having a guarantor on your personal loan might help make the application process much smoother, or lower your interest rate, because the loan is less risky. A lower interest rate means that the loan will cost you less, which could help you pay it off faster.

It’s important that you do your research and make sure you can afford to pay back your personal loan before you apply.

You may want to consider the benefits of a guarantor personal loan if:

• You have bad credit and are struggling to gain loan approval
• You are a new arrival to Australia with little to no credit history
• You are a young Australian with little to no credit history
• You are a Centrelink benefits recipient
• You are a pensioner
• You are self employed

A personal loan guarantor typically helps a borrower to gain approval for the requested loan amount. Unlike a home loan guarantor where you may be able to borrow up to 110% of the value of the property, a personal loan with a guarantor may not allow you to borrow more funds. 

What it may help you to do is gain approval for a more competitive home loan rate. Lenders tend to reserve their lowest home loan rates to more ‘ideal’ borrowers that don’t pose as great a risk of default. Having a guarantor attached to a personal loan lowers this level of risk on the lender, so you may be offered a more competitive interest rate.

As a guarantor, you are legally responsible for the full value of the personal loan, plus associated costs, in the event the borrower were to default. The borrower is still expected to service the personal loan, including interest charges and fees, but it is in the interest of the guarantor to ensure this happens. 

This means you may want to ask the borrower the following questions before you sign on the dotted line:

• What is the loan’s purpose? If you feel it is unreasonable, such as an extravagant holiday, it may be risky going guarantor.
• How much is the loan? Is it relative to the loan purpose?
• How often will the borrower make repayments? Weekly, fortnightly or monthly?
• Have they set a clear budget to repay this loan on time?

 If you’ve decided to act as a guarantor for someone, there are a few things you can do to help safeguard your interests before signing the dotted line:

• Understand the details of the loan that the borrower is taking out, including loan amount, loan term, interest rate etc.
• Assess how secure the borrower’s current income and employment is, as well as the risk of them defaulting.
• Consider how much you’d have to pay in a worst-case scenario and how this could potentially impact your other financial commitments.
• It might be worthwhile getting your own legal advice and financial advice to make sure that going guarantor doesn’t affect your own chances of being approved for a loan down the track. You want to be in the best financial situation possible before making any new financial agreements.

Depending on the size and type of personal loan, each lender has their own exact criteria over who can act as guarantor on a personal loan. 

While some lenders might restrict the role of guarantor to a borrower's parents or immediate guardian, other lenders might be a little more relaxed and accept other relatives, siblings, or grandparents. Although quite unusual, there are some lenders who will accept friends and colleagues as guarantors, if you can prove the relationship is strong.

Guarantors must meet the same lending criteria as other potential borrowers. This can be different for every lender, but generally the criteria are:

• Be over 18 years of age.
• Be a citizen or permanent resident of Australia.
• Have a good credit rating.
• Be able to prove their income and employment.
• Be able to show sufficient savings and have an asset they can put up as loan security.

If you are retired and looking to be a guarantor for your adult child, for example, as long as you can demonstrate you have the assets, savings and even retirement income to support the personal loan, you may be approved as a guarantor.

As the guarantor is the individual who the risk falls on, credit providers will typically expect them to have a good credit score. Guarantors with bad credit could push some of that risk back onto the lender, which is why an application with such a guarantor listed would be more likely to be rejected.

Keep in mind that if the borrower defaults on the personal loan, this will not only impact their credit history but the guarantor’s credit history as well. A personal loan default will be reflected on both credit reports and potentially lower both parties' credit scores.

You may be wondering if you can go guarantor if you already have a loan, or even if you can go guarantor for two or more loans (if you have more than one adult child, for example). The answer is ultimately up to the lender's discretion and whether or not you meet the lending eligibility criteria. 

It may be worth getting a copy of the personal loan product disclosure statement (PDS) and terms and conditions (T&Cs) for more information.

If the borrower cannot service the personal loan, the guarantor will be responsible for making repayments, typically for the total outstanding amount. If, unfortunately, the guarantor also cannot service the personal loan, there is risk of default occurring. 

In this instance, the lender may take legal action, including seizing any assets that have been secured against the personal loan, to help repay the balance. A default will be listed on both the borrower and guarantor’s credit reports.

When it comes to personal loans, having the option of a guarantor is generally a feature and not a separate type of personal loan. When you apply for a personal loan with some lenders, you can choose to have someone act as guarantor.

There are two main types of guarantor personal loans on the market.

Secured guarantor personal loans

If you’re looking to borrow funds and you don’t have any assets, your guarantor can use their car, property, jewellery, boat, or caravan as security against the personal loan.

The upside of securing an asset to a personal loan is that you may be offered a lower rate on average, as there is less risk posed to the lender that you may default. The potential downside is that if you default on your loan repayments, the lender can seize the asset to recoup the money you owe.

Unsecured guarantor personal loans

If you opt for an unsecured guarantor personal loan, you or your guarantor are not required to secure an asset against the loan. Unsecured guarantor personal loans tend to be riskier which means that they may come with a higher interest rate on average.

Before you decide on a secured or unsecured personal loan, you should still do your research and compare the different types of guarantor personal loans on the market.

The way in which having a guarantor on your personal loan might save you money is in interest charges. If you have a bad credit score, it’s unlikely you’ll be offered a very competitive interest rate on your loan. 

As mentioned above, if you have a guarantor who has a good credit score, your chances of being offered a competitive interest rate will likely increase. A lower interest rate will mean less money spent on interest charges, but don’t forget to compare fees and features as well.

In many circumstances, it can be difficult to find someone to act as guarantor on a loan due to the level of risk they would take on should you not be able to meet your repayments.

If this is the case for you, you could consider the following alternatives:

• A joint personal loan: If you have a partner or family member who is willing to co-sign the loan with you, one option is to apply for a joint personal loan together as co-borrowers. Co-borrowers are equally liable for repaying the loan, and if the other individual’s income combined with your own gets you over the minimum income threshold, for example, it could be an option worth considering.
• An unsecured personal loan: Although unsecured loans tend to have higher interest rates than secured loans, they don’t rely on the borrower to offer up assets at collateral. If your lack of assets is what’s preventing you from being eligible for a loan, then an unsecured loan could potentially help with that issue.
• An instant-approval loan: Sometimes called ‘payday loans’ or ‘cash loans’, instant-approval loans provide borrowers with access to small amounts of money, usually up to $2,000, over a short loan term of up to one year. Instant-approval loan providers typically have more relaxed lending criteria, so it can be easier for some to be approved. However, instant-approval loans do tend to come with much higher interest rates, fees, and penalties, so it’s important to do your research before applying for one.
• Buy now, pay later: Buy now, pay later platforms, such as Afterpay or Klarna, can provide customers with access to credit for purchases that are repaid over set instalment amounts. Unlike a personal loan or even a credit card, interest is typically not charged. Instead, the customer may be charged fees, such as late payment fees and monthly fees. A big part of the appeal of buy now, pay later is that most platforms do not require a credit check on their customers, making it a lot easier for most Aussies to sign up. Even though credit checks are currently not a standard requirement, the BNPL industry is likely to introduce some changes in the near future. The Australian government's decision to recognise BNPL companies as credit providers under the National Consumer Credit Protection Act will soon bring them under the same rules and regulations as other credit providers. As a result, BNPL companies will be required to hold Australian Credit licenses and carry out hard credit checks on prospective customers before approving them. While the overall application process is likely to remain relatively easy, it may not be possible for those with a poor credit history to access BNPL services in future.