Personal guarantor loans
You can still get a loan if you don’t meet the eligibility criteria. Here is what you need to know about guarantor personal loans.
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.
What's in this guide?
- How does a guarantor loan work?
- Is a guarantor required for a personal loan?
- How much can I borrow with a guarantor loan?
- What are the requirements to be a guarantor?
- Going guarantor? Consider the following before you say “yes”
- Compare all personal loans
- Questions we’ve been asked about personal guarantor loans
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, and you may no longer able to use that asset as collateral for your own credit needs.
Is a guarantor required for a personal loan?
Not every personal loan requires a guarantor. Using a guarantor is an optional feature that applicants can take advantage of when they are not eligible on their own merits. You generally have the following loans 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.
How much can I borrow with a guarantor loan?
The amount you can borrow with guarantor loans depends on some different variables:
- What type of loan are you applying for? Personal loans usually come with set minimum and maximum amounts. If you are eligible for one of these loans, when applying with a guarantor, you should be able to apply for any amount in this range.
- 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, the lower a loan amount you are likely to be approved for.
- 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?
Going 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 free legal advice before agreeing to be the guarantor on a personal loan. There are community law centres available throughout New Zealand. Alternatively, your local Citizen’s Advice Bureau should be able to provide information of where to get advice.