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Guarantor loans in Canada
Guarantor personal loans could help you get the money you need if you have bad credit.
If you have bad credit or a high debt-to-income ratio, you may need a guarantor to help you qualify for a loan. This involves asking a third-party with good credit to agree to take over your loan payments if you can no longer make them. Find out more about how guarantor loans work, including who you should ask to cosign your loan and what you’ll need to get approved.
How do guarantor loans in Canada work?
A guarantor loan is a loan that is co-signed by a third party who essentially guarantees the loan for the borrower. By signing on to your loan, this person agrees to step in and pay back what you owe if you can’t make your repayments. They also put their own credit rating on the line when they cosign, meaning that their credit score will go down if you miss your payments.
The purpose of a guarantor loan is to make it easier for borrowers to qualify for a loan by taking some of the risk off the lender. A guarantor loan can make it easier to qualify for competitive rates and terms if you don’t meet typical credit, income or revenue requirements.
Having a guarantor can help you strengthen your loan application and access credit you wouldn’t be able to get otherwise.
How does a guarantor differ from a cosigner?
The difference boils down to liability and ownership when it comes to assets. Cosigners names are also usually on the title of assets that they sign for like mortgages or vehicles. When you cosign a loan, it means you’re legally obliged to make payments if the primary borrower defaults on the loan.
As a loan guarantor, there’s a little bit more flexibility. Guarantors names are usually not on the title of assets and they only become liable when the lender has exhausted all means of collection against the person who borrowed the money in the first place.
Cosigners are also more common on personal and student loans, while guarantors are more common on business loans and mortgages.
Apply for a guarantor personal loan in Canada
Why should I consider applying for a guarantor loan?
Many borrowers apply for guarantor loans simply to get better interest rates and terms on their loan. Others apply out of necessity, for the following reasons:
- No credit. If you’re a new borrower and lack credit history, you may need a loan guarantor with a solid track record to strengthen your application.
- Bad credit. Having bad credit can make it difficult to take out a loan by yourself, while having a guarantor can help secure your payments.
- High debt. If you already have a ton of debt, your lender may not feel comfortable giving you another loan without a guarantor.
- Low income. You may have trouble qualifying for a traditional loan with low income.
- No collateral. If you can’t secure your loan with an asset (like your house or vehicle), a guarantor might be the next logical step.
Pros and cons of applying with a loan guarantor
- Easier approval. You’re more likely to get approved for a loan you otherwise wouldn’t have qualified for if you have a guarantor with a good credit rating.
- Lower interest. Finding the right guarantor could make you eligible for lower interest rates.
- Larger amount. Backing your payments up with an extra income could make you eligible to receive more money.
- Better terms. Your lender may give you more-favorable terms if you use a guarantor to de-risk your loan.
- Risk for guarantor. Your guarantor will take on a significant amount of risk when they cosign for your loan, including agreeing to take on your payments if you default.
- Could strain 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. You could still be rejected in which case you’ll need to consider other options, such as a bad credit loan.
What are my options for guarantor personal loans?
There are many types of guarantor personal loans in Canada, but some of the most common are outlined below:
- Unsecured personal loan. With an unsecured guarantor loan, your cosigner agrees to take over the loan payments if you can’t make them.
- Secured personal loan. Secured personal loans are “insured” by an asset like your home or vehicle, with your cosigner acting as an extra layer of financial protection.
- Debt consolidation loan. If you have bad credit, you can ask a guarantor to help you get a loan so that you can lump all your debts into one easy payment with a lower interest rate.
How do you find someone to be your 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 a good credit rating.
Loan guarantor requirements
Cosigning a loan can be a tricky business and some lenders have strict regulations in place to determine who can guarantee the loan of another borrower. Below is a list of loan guarantor requirements.
- High credit score. One of the most important guarantor requirements is that they have a good to excellent credit rating (typically 650 and above).
- Decent income. They will likely need to show proof of income or enough savings to pay back the loan if you fail to make your repayments.
- Stable job and housing. They could also be required to show they’re not a flight risk by proving how long they’ve been employed and have lived at their current address.
- 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. They’ll also need to prove they’re over 18 years of age (in most provinces), usually by showing a piece of government-issued ID.
The government can also act as a guarantor for loans by offering loan guarantee programs. Business loans and mortgages are the most common types of loans guaranteed by the government. Here’s how a few programs break down:
Small and Enterprise Loan and Guarantee program
This program was announced by the government last March and is designed to help ease access to credit for entrepreneurs impacted by COVID-19. It is backed by the Business Development Bank of Canada (BDC) and Export Development Canada (EDC). It enables up to $40 billion in additional lending to help Canada’s financial institutions provide credit and liquidity options that a range of Canadian businesses need.
Canada Small Business Financing Program
This program is backed by the Canadian government and exists to make it easier for small businesses (with gross annual revenues under $10 million) to get loans. Borrowers can get up to $1,000,000 in financing but there are some restrictions as to what the fund can be used towards. Generally, they can be used for the improvement of land, buildings, equipment and renovations but can’t used for the purchase of vehicles and technology, research or franchise fees.
The interest rates of these loans are set by the lender and can be either fixed or variable with maximum cap limits set by the government. A registration fee of 2% of the amount loaned is also charged to the borrow and is either paid up front or added to the loan.
What are my alternatives if I can’t find a loan guarantor?
- Bad credit loan. These loans might be a good fit for you if you have a credit score below 650 and can’t find a guarantor for your loan.
- Credit builder loan. You may be able to get a credit builder loan, which will report every on-time payment you make to help you build up your credit score.
- Credit counselling. Most provinces have dedicated credit counselling services to help borrowers manage their debt loads.
- Debt relief services. You may be able to get some of your debts wiped out with a debt relief program, although this could bring down your credit score.
- 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.
Compare personal loans from other lenders
Most of the lenders below don’t focus only on guarantor loans, but they might ask you for a guarantor to support your loan application.
How to apply for guarantor personal loans
If you’ve found a guarantor who’s willing to sign on to your loan with you, the next step is to find the right lender. Most lenders will need you to follow a couple of simple steps to apply.
- Check your credit score. You should start by checking your credit score to see where you stand. If you’re above 650, you may not need a guarantor to cosign for your loan.
- Compare lenders. Once you know your credit score, you should 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. Both parties may also be asked to supply certain documents like a government-issued piece of ID, tax records, pay stubs or bank statements as proof of income or identity.
Tips to get approved
- 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.
- Have a good reason for needing the loan. Your lender is more likely to give you the green light if they know what you intend to use the loan for.
- 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 cosigner with excellent credit. Look for a loan guarantor that has a credit score above 700 for easy 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.
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