Guarantor Personal Loans: What Are They?

Can I get a guarantor loan if I have bad credit?

Yes. In fact, this is exactly why certain borrowers apply for a loan with the support of a guarantor.

A credit score can indicate how trustworthy and likely you are to repay the loan without issue. If you have a bad credit score, lenders will see you as a riskier borrower. A guarantor with a good credit score can help ease these concerns. If your guarantor also has a bad credit score, however, you may find it hard to get the loan approved. As the bank may feel your guarantor doesn’t offer much guarantee.

The idea is that your guarantor can step up and take responsibility if needed, so your choice of guarantor needs to reflect this. But it’s important to remember that you and your guarantor’s credit score is just one part of this. The lender assesses your application based on several factors (as mentioned above) to ensure that the loan is repaid.

Who can be a guarantor for a personal loan?

To be a guarantor for a loan you generally need to meet the following criteria:

• Over 18 years of age
• A New Zealand citizen or permanent resident
• Have a good credit score
• Able to afford the loan repayments if the borrower cannot, or have assets that can be sold in order to repay the loan

It’s common for a guarantor to be a relative of the borrower, but it’s generally not a requirement.

How do I become a guarantor?

If you meet the eligibility criteria, to act as a guarantor you typically need to provide details of your financial situation as part of the loan application. This could include bank statements, pay slips and details of assets you own.

If the loan is approved, you will need to sign the loan agreement, along with the borrower.

Do personal loans need a guarantor?

Not all personal loans require a guarantor. You may be eligible to borrow money based on your own financial situation, or by getting a loan that is secured by an asset (eg, a secured car loan).

A guarantor is typically only used when an individual cannot get a loan without one, or they cannot secure favourable terms.

What are the risks of going guarantor for a loan?

If you are thinking about becoming a guarantor for someone’s loan, first consider some of the associated risks.

Potential risks to consider include:

• Your credit rating may be affected – if the borrower can’t meet the minimum loan repayments. For example, a default or non-payment on your credit report may make it difficult to borrow money in the future.
• It may impact your application for new credit – as you’ll need to declare that you are a guarantor for another loan on any separate credit application. This can possibly impact your ability to take out the new credit.
• If you’ve provided an asset as security for someone else’s loan – you might not be able to use that security for your own loans in the future. You may also risk losing that asset if both you and the borrower default on the loan.
• A change to your relationship won’t change your legal obligations – if they default on the loan, you will need to pay it. Even if you no longer have a relationship with the borrower. You may want to carefully consider your relationship with the borrower before agreeing to guarantee their loan.
• Entering this kind of agreement could cause damage to your relationship – if there ends up being issues with the loan being repaid it could impact the relationship with the person, who may be a friend or family member.

Consider it carefully

If you’re considering becoming a guarantor for someone’s loan, you should closely consider all the pros and cons before making a decision. You could decide not to act as guarantor for the loan, but help in other ways. Such as contributing to some or all of the borrower’s repayments to help them pay off the loan faster. However, this would only be an option if the borrower is eligible for credit without a guarantor.

Another option could be, if you have the funds, to loan the money yourself. Although this comes with risks of its own.

To avoid financial stress, you may want to seek professional financial advice or counselling, and thoroughly check the terms and conditions of the loan agreement before signing up to be a guarantor.

If you do become a guarantor, it may be less risky if the loan is for a fixed amount, with a clear repayment term. This way you know how much you are guaranteeing and for how long.

Again, you may want to seek legal advice.

What’s the difference between a guarantor and a co-borrower?

A guarantor agrees to become financially responsible for the loan only in the event that the original borrower defaults. Whereas a co-borrower is as equally responsible for the loan as the original or main borrower from the get-go. Essentially, a co-borrower is taking out a loan, not acting as reassurance for one. Thus, they are subject to the same financial and legal penalties if payments are missed or the loan defaults.

Co-borrowing and having a guarantor for a loan achieve a similar purpose in that they may help someone borrow more than they would otherwise be able to. But be sure to weigh up the risks to all parties involved.

Compare Personal Loans with Canstar

About the reviewer of this page

This report was reviewed by Canstar Content Producer, Andrew Broadley. Andrew is an experienced writer with a wide range of industry experience. Starting out, he cut his teeth working as a writer for print and online magazines, and he has worked in both journalism and editorial roles. His content has covered lifestyle and culture, marketing and, more recently, finance for Canstar.