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.
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.
| Lender | Product Name | Advertised Rate | Comparison Rate | Monthly Repayment |
|---|---|---|---|---|
| Savvy | New Car Loan | 2.85% fixed | 3.93% | $537.06 |
| Bank of Australia | Used Car Loan | 6.45% variable | 6.66% | $586.28 |
| ANZ | Online Secured Car Loan | 7.85% fixed | 8.70% | $606.14 |
| CUA | Fixed Rate Car Loan | 7.99% fixed | 8.29% | $608.15 |
| BankSA | Secured Fixed Personal Loan | 8.49% fixed | 9.39% | $615.35 |
| St George | Secured Fixed Personal Loan | 8.49% fixed | 9.39% | $615.35 |
| CBA | Secured Car Loan | 8.49% fixed | 9.54% | $615.35 |
| NAB | Variable Rate Personal Loan | 14.19% variable | 15.06% | $701.01 |
* Commercial loan with the loan amount of $40,000 is looking at a 5 year secured fixed rate of 2.85% p.a. and comparison rate of 3.93% p.a.. WARNING: all fees and charges may not be included on the example above, only the comparison rates, monthly repayment and total cost applies. Therefore, the total cost of the loan might be different. Comparison rate do not include broker fees, redraw fees, early termination fees and fee waivers. Comparison rate may change as a result of the different loan terms, fees and the loan amounts. Establishment fees and monthly fees do not apply to commercial loans, only consumer loans. However, there might be different fees apply.
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.
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.
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.
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.
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