If you have bad credit or a high debt-to-income ratio, you may need a guarantor to help you qualify for a loan. A guarantor is a relative or friend with good credit who agrees to take over your loan payments if you can no longer make them. Keep reading to find out more about how loans with a guarantor work, including who you should ask to be a guarantor and what you’ll need to get approved.
A guarantor loan is a loan that is co-signed by a third party who guarantees the loan for the borrower. In other words, this person agrees to step in and pay back what you owe if you can’t make your repayments.
The purpose of a guarantor loan is to make it easier to qualify for a loan. If you have bad credit or a limited credit history, getting a guarantor for your loan will strengthen your application.
As far as the lender is concerned, if your guarantor has excellent credit and a steady income, there will be much less risk offering you a loan. This allows you to get a loan if you don’t meet typical credit requirements, and it can also help you qualify for competitive rates and terms.
However, you’ll need to have a suitable person in your life who is willing to guarantee your loan — and who understands that they’ll be liable to pay off the loan if you can’t.
Why apply for a loan with a guarantor?
There are several situations where it makes sense to consider a guarantor loan, such as:
If you’ve got bad credit. If you have bad credit or no credit history, it’s difficult to qualify for a loan from a traditional lender. But if you apply for a loan with a guarantor who has strong credit, you’ll be a much less risky prospect in the eyes of lenders.
If you have a high debt-to-income ratio. If your existing debt payments take up a big chunk of your income, most lenders won’t give you a loan without a guarantor.
If you don’t have any collateral. If you can’t secure your loan with an asset (like your house or vehicle) to access better rates and terms, a guarantor can help you find the funding you need.
The main benefit of a guarantor loan is that it makes it easier for borrowers who don’t meet traditional lending criteria to qualify for a loan. But there are a few other benefits too:
Lower interest rates. Bad credit loans come with steep interest rates. A guarantor loan may give you a better rate and lower the cost of borrowing.
Larger loan amounts. Applying with a guarantor could help you secure a larger loan than you would be able to secure on your own.
Improve your credit. By making on-time payments towards your loan, you’ll be able to boost your credit score and increase your future chances of loan approval.
What to watch out for with guarantor loans
While loans with a guarantor have plenty of benefits, there are several other drawbacks to consider before you apply for this type of loan:
Risk for guarantor. Your guarantor will take on a significant amount of risk when they guarantee your loan, including agreeing to take on your payments if you default. This could have a negative impact on their credit score and place them under financial stress, while they may also be required to put their own assets up as security for the loan.
Could strain your relationship. Your personal relationship with your guarantor could suffer if you don’t make your repayments on time.
Joint application. You’ll need to coordinate with your guarantor to get your application filled out properly.
No guarantee of approval. Even with a guarantor your loan application could still be rejected. You’ll then need to consider other options, such as a bad credit loan or payday loan.
High rates. You can typically expect higher interest rates on a guarantor loan than you would get with a conventional personal loan.
Sketchy lenders. Keep an eye out for disreputable lenders who target borrowers with bad credit. Make sure you’re dealing with a legit lender and that you recognise the warning signs of a personal loan scam.
Eligibility requirements for loans with a guarantor in Canada
If you want to qualify for a guarantor loan in Canada, you’ll need to:
Be 18 years of age or older (or the age of majority in your province).
Be a Canadian citizen or resident.
Have a steady source of income.
Of course, your guarantor will also have to satisfy a range of criteria, as outlined below.
Who should I choose to be my loan guarantor?
When it comes down to picking the right loan guarantor, you should be sure to pick someone you trust (and who trusts you in return). Many people turn to friends, family members and business partners to help them get the money they need. A good rule of thumb is to pick someone who is financially responsible and has an excellent credit rating.
While the exact requirements vary between lenders, your guarantor will typically need to meet the following criteria:
High credit score. One of the most important guarantor requirements is that they have a good to excellent credit rating (typically 660 and above).
Income or savings. The guarantor will need to show proof of a stable source of income or enough savings to pay back the loan if you fail to make your repayments.
Good debt-to-income ratio. The guarantor will also need to show that they have a low level of existing debt and can manage their regular living expenses along with any loan repayments.
Canadian resident. For some loans, your guarantor will need to have lived in Canada for a certain period of time to cosign.
Age of majority. The guarantor will also need to prove they’re over 18 years of age (or the age of majority where they live) by providing photo ID.
What to consider before becoming a guarantor
When you guarantee a loan, you can help a close friend or loved one out of a tough financial situation. But it also comes with several risks attached, so think carefully before deciding whether you’re willing to step up.
First, consider your own financial situation. Do you have a stable job? How much existing debt do you have? If you were forced to cover a missed payment or fully repay the borrower’s loan, would you still be able to comfortably cover your regular expenses? What impact might it have on your lifestyle?
Next, think about the person who has asked you to guarantee their loan. How well do you know them? Do you trust them to manage their money wisely and keep up with repayments? What previous financial decisions have they made that mean they need a guarantor?
And finally, think about the relationship you share with the borrower. If things go wrong and you have to repay their loan, will your relationship survive?
There’s a lot to consider, so don’t feel pressured into rushing your decision. Only once you’re sure that it’s a sensible choice should you agree to become a guarantor.
How to apply for a guarantor loan
If you’ve found someone who’s willing to guarantee your loan, the next step is to find the right lender. Most lenders will need you to follow a few steps to apply, and it’s easy to apply for loans with a guarantor online in Canada.
Check your credit score. You should start by checking your credit score to see where you stand. If you’re above 660, you may not need a guarantor for your loan.
Ask your guarantor. Find the right person to act as guarantor — a high credit score and steady income are essential. You’ll also need to make sure they know exactly what being a guarantor involves before they agree to help.
Compare lenders. Next, compare lenders to find the best interest rates and terms for your loan.
Fill out your application. When you’re ready to apply, both you and your guarantor will need to provide your personal and banking info through an online or in-person application.
Submit additional documents. You and your guarantor may also be asked to supply certain documents, such as photo ID and bank statements to prove your identity and income.
How to increase your chances of getting approved for a guarantor loan
The following simple tips will help you maximize your chances of loan approval:
Find a specialized lender. It’s better to find a specialized lender that advertises guarantor loans as one of their financial products.
Only borrow what you need. The smaller the loan you ask for, the more likely you are to be approved.
Prove your income can cover repayment. You should be able to prove that you have enough money coming in every month to pay back your loan.
Use a guarantor with excellent credit. Look for a loan guarantor that has a credit score above 700 to increase your chances of approval.
Reduce your current debt load. Find a way to get rid of some of your smaller debts so that your debt-to-income ratio is lower.
What are my alternatives if I can’t find a loan guarantor?
It’s not all doom and gloom if you can’t find a guarantor for your loan. Consider these other options instead:
Bad credit loan. A bad credit loan might be a good fit for you if you have a credit score below 600 and can’t find a guarantor for your loan. Lenders focus on your income and ability to repay a loan rather than your credit score, but high interest rates apply. Learn more about the best bad credit loans.
Credit builder loan. You may be able to get a credit builder loan, which sees the lender report every on-time payment you make to help you build up your credit score. However, you don’t get access to the funds until you’ve paid off your loan.
Payday loan. Payday loans offer fast access to short-term loans of up to $1,500. However, they’re extremely expensive, often featuring APRs of 300% or higher, so make sure you consider a range of other options first. Learn more about the best payday loans.
Credit counselling. Most provinces have dedicated credit counselling services to help borrowers manage their debt and improve their financial wellbeing.
Borrow from family or friends. If you can’t qualify for a loan, you could ask a family member or friend to spot you some cash while you build up your credit rating.
Bottom line
A guarantor loan is an option worth considering if your poor credit history makes it hard for you to qualify for a personal loan. But it’s a big commitment for the guarantor, so make sure they understand exactly what’s involved before you apply.
Frequently asked questions
A guarantor is a person who guarantees a loan for a family member or friend. If the borrower is unable to repay what they borrow, the guarantor becomes responsible for repaying the loan.
Yes. Some online lenders provide guarantor loans to borrowers with bad credit. However, you'll need to find someone with good credit and a steady source of income who is willing to guarantee your loan.
Yes. One of the key requirements to become a guarantor is to have a good to excellent credit score, so you'll need to complete a credit check during the application process.
Not necessarily. However, they will need to be able to demonstrate to the lender that they will be able to afford to repay the outstanding amount if you default on the loan.
They will have to provide their personal details including their full name, email, phone number, date of birth and Social Insurance Number (SIN). They will also need to provide employment and income details using pay stubs or bank statements.
While both guarantor and secured loans are less risky to the lender, they aren't quite the same.
Guarantor loan. Makes a third-party person or entity responsible for paying back the loan if the borrower defaults.
Secured loan. The loan is backed with an asset as collateral — like a home or a car. If the borrower defaults, the lender can seize and sell the collateral to recoup its losses.
Tim Falk is a freelance writer for Finder. Over the course of his 15-year writing career, he has reported on a wide range of personal finance topics. Whether you're investing in stocks and ETFs, comparing savings accounts or choosing a credit card, Tim wants to make it easier for you to understand. When he’s not staring at his computer, you can usually find him exploring the great outdoors.
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