Lenders put in place lending criteria to help them determine who can and cannot manage repayments for personal loans. These criteria include minimum age, income, employment and credit history requirements. If you don’t meet one, a few or all of these requirements, you can consider enlisting the help of a family member or close friend to guarantee the loan for you.
So what does guaranteeing a loan mean for the borrower and the guarantor?
This guide will take you through the ins and outs of guarantor loans, the benefits available to borrowers and how to avoid some common pitfalls.
How does a guarantor loan work?
When you ask someone to guarantee your loan, you are asking them to take on your debt if you default on your loan. If you agree to be a guarantor on someone’s loan, you become legally responsible for the debt if they become unable/unwilling to manage their repayments.
If you are a guarantor and you apply for further credit of your own, you will need to list the guarantee on your application. You may also have to put up an asset to guarantee a person’s loan, such as equity in your home or a car. Until the loan is paid off, you may no longer able to use that asset as collateral for your own credit needs.
As a borrower, you generally have the following loan types available to you:
- Secured loans. If you are looking to buy a car or you, or your guarantor, have an asset to use as collateral, a secured personal loan is an option for you. These loans come with more competitive interest rates because they are less of a risk to the lender. Keep in mind the additional risk the guarantor takes on if it is them offering up the asset as collateral.
- Unsecured loans. More flexibility is on offer with an unsecured personal loan, and it does not require an asset to be declared from you or your guarantor. Variable or fixed rates are usually available for periods between six months and seven years.
Is a guarantor required for a personal loan?
A large portion of people don’t need a guarantor when applying for a loan as they meet the lending criteria set out by banks and other financial institutions. Using a guarantor is an optional feature that applicants can take advantage of when they are not eligible on their own merits.
If you fall into one or more of the following scenarios, a guarantor loan is worth considering to improve your chances of getting approved for a personal loan:
- You are under 21. While many lenders state that you must be 18 to apply, you may not have built up a credit history that shows responsibility with money and making regular repayments. Some lenders will only accept applicants who are between the ages of 18 and 21 if they have a guarantor.
- You have a bad credit history. Not everyone has a perfect credit score, but your credit file is one major factor in deciding if you are eligible for a loan. Even if you have better control of your finances than you did in your past, a lender may be cautious to lend to you if they can see that you had previous loan defaults.
- Your income is not steady. Lenders like to see that you have regular income so that you can meet the repayments. Even if your annual income figure is over the minimum required amount, wages that change from week to week or month to month can put you at a disadvantage.
- You’re not wise with money. Since lenders require to see bank statements during your application, they can pick up on unfavourable habits such as online gambling. They can also see if you are frequently going into overdraft and not making an effort to save or put money aside for emergencies. Having money in a savings account proves to the lender that you are more experienced in managing your finances.
- You don’t have any assets. Secured loans often get you a better interest rate, but if you don’t have an asset such as a vehicle or property to use as collateral, you won’t be eligible.
- You already have a large amount of debt. You may need a loan for a legitimate reason or for an emergency, but having multiple debts can hinder your charges of access to more credit. If you are struggling to keep on top of things, a debt consolidation loan is worth considering.
How much can I borrow with a guarantor loan?
The amount you can borrow with a guarantor loan depends on some different variables:
- What do you want to finance? If you are looking to purchase an asset such as a car, lenders may restrict you to borrowing the value of the vehicle. If you’re borrowing to take a holiday, or something similar, lenders may not approve you for the amount you request, as the loan is more of a risk to them.
- What financial situation are you and your guarantor in? Your income, credit history and employment situation will help lenders determine your capacity to manage your repayments and their own risk of taking you on as a borrower. Similarly, your guarantor’s financial circumstances play a part in this risk level – if you are unable to repay your loan and they become responsible for the repayments. The higher your determined risk, you are likely to be approved for a lower loan amount.
- What lender are you applying with? Lenders have varying eligibility criteria, personal loan products and loan amounts available. Opt for a lender that offers you the loan amount you are looking for to ensure you have a better chance of being approved for the loan you need.
What are the requirements to be a guarantor?
A guarantor must be over 18, but some lenders state that the minimum age is 22. This is because they require applicants who are 18 to 21 years of age to have a guarantor.
You must be a New Zealand citizen or permanent resident, have a regular income, good to excellent credit history and the ability to repay the debt if the borrower doesn’t.
You have to agree to a credit check and understand that the loan will be recorded on your credit report.
Asked to be a guarantor? Consider the following before you say “yes”
- Are you satisfied the person you are guaranteeing can manage the loan repayments? It is up to you to do this and may involve seeking independent financial advice.
- I have checked the terms of the loan agreement. This includes checking whether the guarantee is unlimited or limited, and whether you can expect to be notified if the borrower defaults on the loan. If a loan is unlimited, you may be held liable for the borrower’s other debt, eg credit cards or other loans. A limited loan means you agree to cover their debt to a specified amount. However, the lender does not have to comply, even if you ask for a loan to be limited.
- I understand the lender doesn’t have to proceed with enforcement against the borrower before taking legal action against me as a guarantor. You have no right to insist on this as a guarantor.
- I understand the capacity under which I am signing the guarantee. For instance, if you are a director, are you signing a personal guarantee? If you are part of a trust, is the guarantee limited to the trust’s assets?
- I have received legal advice before agreeing to become a guarantor. You can seek legal advice before agreeing to be the guarantor on a personal loan. If you don’t have a lawyer, your local Citizen’s Advice Bureau can point you in the right direction.
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