Guarantor Personal Loans: How They Work and the Risk to Your Guarantor
Learn how guarantor personal loans work and the risks a guarantor takes on. Understand the guarantor's obligations, lender steps, and credit impact.
What Is a Guarantor and How Does It Work?
A guarantor is someone who agrees to be responsible for your loan repayments if you cannot make them. In Australia, a guarantor can be a friend, family member, or other eligible person.
When you apply for a guarantor personal loan, the lender assesses your application along with the guarantor’s financial situation and credit history. The guarantor does not have to make the payments while you are meeting your obligations. However, if you default, the lender can ask the guarantor to pay the outstanding amount.
What Could the Guarantor Be Asked to Pay?
If you fail to repay the loan, the lender can ask your guarantor to repay the total amount you owe. This includes the loan balance, interest, and any other fees that are part of the debt.
In practice, the guarantor may be asked to repay the entire loan, not just a portion. The lender may also take steps to recover the debt from the guarantor, up to and including legal action.
How Does Being a Guarantor Affect Their Credit?
If the guarantor has to make payments because of your default, their credit score and credit history can be affected. Even if they are not making payments, a loan for which they are a guarantor may appear on their credit file when an application is made and while the loan is active, depending on the lender’s reporting and the credit bureau’s practices.
The guarantor’s credit file may show the guarantor loan as a liability. If the loan goes bad, this could hurt their ability to get credit in the future.
Key Considerations Before Becoming a Guarantor
- Understand that you could be asked to pay the entire debt if the borrower defaults.
- Recognise that being a guarantor may affect your own credit score and history.
- Get clear terms in writing from the lender about the guarantor’s obligations.
- Consider whether you can afford to take on the debt if the borrower does not repay.
If you are thinking of becoming a guarantor, weigh the risks carefully. A guarantor arrangement can help a borrower who might not otherwise qualify, but it also places a significant financial and credit burden on the guarantor.