What Is A Guarantor On A Car Loan?

Heard about guarantors on car loans? Here’s an explanation to help you get approved for a car loan.
No obligation. It won't affect your credit score.

Last updated on May 4th, 2022 at 04:10 pm by Bill Tsouvalas

What Is A Guarantor On A Car Loan?

A guarantor is a person who agrees to take responsibility for a loan if the borrower does not make his or her payments. This is a “guarantee” that in the event of a default, the guarantor will be a “fall back” to pay off the loan in their place. Guarantors can be anyone such as friends, family, or colleagues. However, they should know that their money is on the line if they agree to be a guarantor. Guarantors help people with bad credit, younger people with no credit history, pensioners, or people on Centrelink benefits get approved for car loans.

How do you know you need a guarantor?

There is no “one size fits all” situation when it comes to needing a guarantor. However, guarantors are often used in situations when a borrower is seen as a high risk to lenders, even if they have good finances otherwise.

This could be:

If your situation resembles one of these categories, your loan application may benefit from having a guarantor.

  • Students or apprentices buying their first car
  • New arrivals to Australia who do not have any credit history
  • Young adults that are new to the workforce
  • Pensioners and Centrelink benefits recipients
  • People with low credit scores or bad credit

Why choose Savvy?

How guarantors on car loans work in practice

What a guarantor needs to know

Before a friend or relative signs up to be a guarantor on a car loan, they need to know what they’re liable for legally.

Once someone is made a guarantor on a car loan, they are legally responsible for the payment of the full amount of the loan as well as fees and charges if the borrower defaults. This will also be recorded on the borrower’s and the guarantor’s credit history.

If the guarantor cannot pay back the amount owing, the lender has the right to repossess any assets to cover these losses. The guarantor does not have any entitlement to the property being financed.

When a guarantor volunteers to take on this responsibility, they need to know what the loan is for, how much they are liable for, how much repayments the borrower will make each month/fortnight/week, and whether the loan will have an impact on the guarantor’s credit rating. Lenders may check the credit of a guarantor to ensure the guarantor is in good financial standing.

Guarantors can also pull out of the agreement before your application is approved; they can also drop out if the loan contract ends up being different from the original document as signed by the guarantor.

Who can be a guarantor?

A guarantor must be over the age of 18 and an Australian citizen. Your guarantor must have a good financial record and a good credit score. The guarantor must have better creditworthiness than the borrower, otherwise brokers or lenders will not consider your car loan application with a guarantor.

A guarantor should also be employed and/or have a good residential history.

Guarantors, loan amounts, and interest rates

Having a guarantor as part of your car loan agreement can help you with securing car loan finance. Since the guarantor is “backing up” your claim to be a low risk, your guarantor’s finances can dictate the amount you can borrow and what interest rate you are eligible for.

If you have bad credit and take out a loan without a guarantor, your interest rate will be higher than if you had a guarantor.

You may be able to borrow a higher amount when you approach a lender with a guarantor, which can help you purchase a specialised vehicle such as a ute for work, for example.

Having a guarantor may also give you the option to take out an unsecured loan, in some circumstances.

Top Tips on what to do when applying for a car loan with a guarantor​

Calculate how much you need to borrow and your repayments. Find out how much you can afford whether you have a guarantor in place or not.

Ask a friend, relative, or colleague to act as guarantor. They will be responsible for your loan if you default, so make sure they are across their responsibilities before they commit.

Approach your lender or broker. A broker may be able to find loans that suit your situation with a guarantor, with more competitive rates.

Have your guarantor sign an agreement. This agreement will legally bind your guarantor to the loan at this point. The loan contract should be the same as what is put forth in the agreement; a guarantor can back out of the loan if the contract and agreement does not match. It is a good idea to get legal advice at this stage.

Make sure you can afford the loan. Remember: it’s not just your finances on the line, it’s your guarantor’s.

Questions about guarantor-based car loans answered

I’ve been rejected for finance before the lender did a credit check. Do I need a guarantor to get a car loan?

In this case, having a guarantor can help you get approved for a car loan as the lender will check their credit to determine the overall risk of the loan.

I have bad credit. Can I use a guarantor?

Yes. If you have a guarantor, it may give you more freedom to borrow more than what would be offered without a guarantor. It may also give you access to lower interest rates.

I am after a secured car loan. Why is that different from a guarantor?

Having a security against a loan offers a lender less risk when approving a loan but does not lower it enough to avoid losses in their view. If a borrower defaults, the lender must spend more money to recover the debt, which only partially covers their losses. Responsibility for paying the loan falls to a guarantor, which is a far lower risk for a lender.

What happens if I cannot pay back a loan?

The responsibility for paying back the loan then falls to the guarantor. If they cannot pay the loan, the guarantor will default, and lenders will repossess the vehicle. It could also damage your guarantor’s credit history.

I already got a loan but now have a willing guarantor. What can I do?

If you already have a loan you may be able to refinance your current loan with a guarantor. Make sure the refinancing loan is cheaper or attracts less interest than the original loan.

What is a joint car loan? Is it the same as a guarantor?

A joint car loan means the car’s ownership, repayments, and is split between two parties. It is different from a guarantor, as a guarantor does not own any part of the car at any time.

Does being a guarantor affect their credit history?
Yes. They will need to have their credit checked to make sure they are in good financial standing.
The borrower has failed to pay back their loan. What happens to the guarantor?

The guarantor is legally responsible to pay back the loan and any charges owing. If the guarantor does not pay back the loan, the account will default.