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Thinking about buying a car but worried your circumstances might hold you back? A guarantor could be the key to unlocking your dream car. But what exactly is a guarantor and how can they help you secure a car loan? This comprehensive guide from Savvy will delve into everything you need to know about guarantors, from their role in the car loan process to the impact they have on your loan terms.
What is a guarantor?
A guarantor is a person who agrees to take responsibility for a loan if the borrower does not make their payments. In the event of a default, the guarantor will be a fall-back, offering assurance that the loan will be repaid even if the borrower is unable to. In the context of car loans, a guarantor can help individuals with limited credit history or poor credit scores to secure financing. While you can ask anyone such as friends, family or colleagues to act as a guarantor, it is crucial that they are aware that their money is on the line if they agree.
When might I need a guarantor for my car loan?
Guarantors are often used in situations when a borrower is seen as a high risk to lenders. This could be:
- Students or apprentices buying their first car
- New arrivals to Australia or temporary residents who do not have any credit history
- Young adults who are new to the workforce
- Pensioners and Centrelink benefits recipients
- People with low credit scores or bad credit
In these situations, a guarantor can help to bridge the gap between your financial circumstances and the lender’s requirements, making it possible for you to obtain the necessary financing for your car purchase.
Who can be a guarantor on a car loan?
A guarantor can be anyone who meets the lender’s criteria, such as family members, friends, domestic partners and employers. However, becoming a guarantor for a car loan in Australia isn't a decision to be taken lightly. Lenders typically have stringent eligibility requirements in place to ensure that guarantors are financially capable of fulfilling their obligations. To qualify as a guarantor, one must typically:
- Be over the age of 18
- Be an Australian citizen
- Have a good financial record and stable income source
- Have a good credit score
- Have a solid understanding of the responsibilities involved
It's essential for both the borrower and the potential guarantor to understand the obligations and risks involved before entering into such an arrangement.
What do guarantors need to know?
Being a guarantor is a serious commitment. Here's what your guarantor needs to understand:
- Financial responsibility: when someone agrees to be a guarantor, they are agreeing to take on the responsibility of repaying the loan if the borrower defaults. This means that they may be liable for the entire outstanding loan amount, including any accrued interest and fees.
- Impact on credit score: defaulting on a loan as a guarantor can have a significant impact on their credit score. It's crucial they consider how this could affect their ability to obtain credit in the future and their overall financial health.
- Legal obligations: by signing the loan agreement, the guarantor is entering into a legally binding contract. It's essential they carefully review the terms and conditions of the loan and seek legal advice if necessary to ensure they understand their obligations.
- Potential loss of assets: if the borrower defaults, the guarantor may be required to liquidate assets to cover the outstanding debt. It's essential to consider the potential loss of assets when agreeing to act as a guarantor.
- Exit strategies: in some cases, guarantor arrangements may allow for an “exit strategy” after a certain period of on-time repayments by the borrower. This can vary depending on the lender, so it's important to explore this possibility with the lender or broker.
It's important for guarantors to maintain open communication with the borrower throughout the loan term. This includes staying informed about the status of the loan payments and addressing any issues or concerns promptly.
The guarantor may also wish to seek independent financial and legal advice to fully understand the implications and determine whether acting as a guarantor is the right choice.
Can having a guarantor impact your car loan amount and interest rate?
Having a guarantor can not only help you secure a car loan but may also help you get better loan terms and rates. 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.
Lower interest rates
If you have a less-than-stellar credit history, going solo on a car loan can lead to higher interest rates. However, with a guarantor by your side, lenders may offer more competitive interest rates, reflecting the reduced risk associated with the loan.
Higher loan amounts
Using a guarantor can extend your borrowing capacity. Lenders may feel more comfortable extending larger loan amounts when they have the assurance of a guarantor's financial backing. This flexibility can be particularly advantageous when purchasing specialised vehicles like work utes or trucks.
How to apply for a car loan with a guarantor
The process of applying for a car loan with a guarantor typically involves the following steps:
- Research and comparison: begin by researching different lenders and comparing their loan offerings to find the most suitable option. Calculate how much you need to borrow, your repayments and what you can afford.
- Talk to your guarantor: have an open conversation with your potential guarantor, explaining your car loans goals and how a guarantor could be helpful. Make sure they understand their responsibilities before they commit.
- Consultation: discuss the possibility of having a guarantor with the chosen lender. They will provide you with detailed information about the requirements and procedures involved.
- Documentation: both the borrower and the guarantor will need to provide various documents, including proof of identity, income verification and credit history.
- Approval and agreement: once the application is submitted, the lender will assess the provided information and determine whether to approve the loan. If approved, all parties involved will be required to sign a legally binding agreement outlining their respective obligations.
- Loan repayment: after the loan is disbursed, it's essential for the borrower to make timely repayments to avoid defaulting on the loan and putting the guarantor at risk. Remember: it’s not just your finances on the line, it’s your guarantor’s too.
What are the alternatives to a guarantor car loan?
When seeking a car loan, having a guarantor isn't the only option available. Depending on your financial situation and credit history, there are several alternatives to consider:
- Secured car loans: instead of relying on a guarantor, you could opt for a secured car loan where the vehicle itself serves as collateral.
- Co-signer on the loan: similar to a guarantor, a co-signer agrees to share responsibility for the loan and repayments. However, unlike a guarantor who acts as a secondary source of repayment, a co-signer is equally liable for the loan from the outset. This can be a viable option if you have someone willing to share the loan responsibility with you.
- Improving your credit score: taking steps to improve your credit score before applying for a car loan can increase your chances of approval and help you qualify for better loan terms. This may involve paying off existing debts, making timely bill payments and reducing credit card balances.
- Saving for a larger deposit: increasing the size of your deposit can lower the amount you need to borrow, reducing the lender's risk and potentially improving your loan terms. Saving up for a larger deposit demonstrates financial responsibility and may make you a more attractive borrower.
- Buying a cheaper car: by opting for a more affordable car, you'll likely need a smaller loan amount and could qualify without needing a guarantor.
If you're considering purchasing a car but are concerned about your circumstances, a guarantor could be the solution you're looking for. Whatever type of car loan you are looking for, Savvy can help. We work with dozens of lenders across Australia to find car buyers a financing solution that suits their needs and budget. Get started with a free, no-obligation quote today.
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This guide provides general information and does not consider your individual needs, finances or objectives. We do not make any recommendation or suggestion about which product is best for you based on your specific situation and we do not compare all companies in the market, or all products offered by all companies. It’s always important to consider whether professional financial, legal or taxation advice is appropriate for you before choosing or purchasing a financial product.
The content on our website is produced by experts in the field of finance and reviewed as part of our editorial guidelines. We endeavour to keep all information across our site updated with accurate information.
Approval for car loans is always subject to our lender’s terms, conditions and qualification criteria. Lenders will undertake a credit check in line with responsible lending obligations to help determine whether you’re in a position to take on the loan you’re applying for.
The interest rate, comparison rate, fees and monthly repayments will depend on factors specific to your profile, such as your financial situation, as well others, such as the loan’s size and your chosen repayment term. Costs such as broker fees, redraw fees or early repayment fees, and cost savings such as fee waivers, aren’t included in the comparison rate but may influence the cost of the loan. Different terms, fees or other loan amounts may result in a different comparison rate.
