Having trouble getting approved for a loan on your own? If so, consider asking a trusted friend or family member to be your loan guarantor, which can boost your odds of loan approval. But what is a guarantor, and what are the requirements to be one?
Key Points
- A guarantor is someone with good credit and strong income who backs a loan for a borrower who is unable to qualify for a loan on their own.
- The guarantor’s role is to guarantee that the loan payments will be made on time on a regular basis.
- Guarantors are legally obligated to repay the loan if the borrower defaults, which can damage their credit, strain relationships, and impact their ability to borrow in the future.
What Is A Loan Guarantor?
A guarantor is someone who agrees to take over loan payments in the event the borrower defaults on the loan. Guarantors are usually required if the primary borrower has credit issues, a low income or high debt.
Learn more: What Is A Guarantor Loan?
Who Can Be A Loan Guarantor?
Most guarantors are family members or friends, simply because of the close relationship involved. That said, anyone can be a guarantor, as long as they meet the lender’s requirements.
Who Can Be A Guarantor For A Personal Loan?
When it comes to personal loans, banks require that guarantors demonstrate good credit history and reliable income, no matter what their relationship is to the borrower. That means a guarantor for a personal loan may be a spouse, sibling, friend, or distant relative, as long as they can qualify and meet the financial criteria.
However, lenders often scrutinize non-family guarantors more – especially friends – before approving them.
Who Can Be A Guarantor For A Car Loan?
For car loans, lenders usually prefer parents and spouses, though siblings and grandparents may also qualify. While friends are not necessarily prohibited, they’re less frequently approved. Ultimately, financial institutions lean toward guarantors with financial stability who also have close personal ties to the borrower.
Who Can Be A Guarantor For A Mortgage Loan?
Mortgage lenders have stricter standards for guarantors for home loans, given the substantial amounts and long-term commitments of mortgages. Spouses and parents are typically the most accepted, while siblings and grandparents may qualify if they can demonstrate strong financial reliability.
On the other hand, friends are rarely approved, as lenders prefer closer ties to minimize high-risk arrangements.
Requirements To Be A Guarantor
Lenders require guarantors to be financially stable individuals with good credit and income. Here are a few factors lenders will require:
- Residency: Have a Canadian address and have lived in Canada for a specific period of time.
- Age: Be the age of majority in their province.
- Credit Score: Have a good credit score (~660+)
- Income: Earn a sufficient and stable income that can cover the loan payments in the event the borrower defaults. Documentation may be required to prove income level and job stability.
Ultimately, the guarantor must be prepared to take over the loan if the borrower defaults at any point. This means that if the borrower is unable to continue making payments, the guarantor will be responsible for paying the full loan amount as outlined in the contract.
Learn more: How To Get A Guarantor Loan In Canada
Process Of Becoming A Guarantor
To become a guarantor, you generally will need to take the following steps:
- Prove Eligibility: Before becoming a guarantor, you’ll need to prove your eligibility to be one. You’ll need to provide the lender with certain documents, such as bank statements, a letter of employment, a statement of assets, and identification.
- Sign A Guarantee Document: If the lender approves you as a guarantor, you’ll need to sign the lending contract. A lawyer may also need to be involved.
| Pro Tip: Before signing the agreement, request a copy of the loan agreement and all other documents that the borrower signs, and ensure you understand all the terms. Some important things to verify include: – Whether you’re guaranteeing a specific amount or future advances. – Whether the lender is using some or all of the asset as collateral. – Under what conditions would you be required to take over the loan. |
Guarantor Vs. Cosigner
A guarantor differs slightly from a cosigner, especially when it comes to a secured loan that involves collateral, such as a mortgage or auto loan.
Guarantor
Using a mortgage as an example, a guarantor’s name is not on the title of the home and doesn’t share the same property rights as a co-signer.
In this case, a guarantor’s name is only on the mortgage and not on the property’s title. The role of the guarantor is just to guarantee that the home loan payments will be made every month to ensure loan approval.
Guarantors are usually liable for default only when the lender has done everything possible to get the primary borrower to make the payments. The responsibilities of a guarantor are to make loan payments if the borrower defaults.
Cosigner
A cosigner, on the other hand, will usually have their name on the title of the home or automobile. Meaning, a cosigner legally has the same rights to the property and must sign all the mortgage papers.
A cosigner is essentially a co-borrower and shares equal responsibility for the loan. If the borrower were to miss one payment on the loan, the lender can immediately pursue the cosigner to pay.
Things To Consider When Becoming A Loan Guarantor
Becoming a guarantor is a huge undertaking that comes with significant financial responsibilities. Before you agree to become a guarantor, consider the following:
You’ll Be Responsible For Payments
You must be entirely comfortable taking over loan payments if the borrower defaults. That means you should have the financial means to add extra loan payments to your budget if the borrower defaults. If you’re worried about potentially having more loan payments, you might want to reconsider becoming a guarantor.
Your Credit Could Be Affected
Establishing good credit takes time and effort. You don’t want to do anything that could sabotage your credit scores, as this could affect your ability to secure future loans or credit.
If the borrower defaults on the loan, your credit profile could be negatively impacted. That’s because you’ll be taking over the responsibility for the loan. This situation can be exacerbated if you fail to cover the payments yourself.
Ask The Borrower To Get Insurance
An insurance policy can cover the loan amount in case the borrower suffers a disability that renders them unable to work or passes away.
Consider The Borrower’s Reliability
Do you trust the borrower? How likely is it that they will be diligent with making loan repayments? While you’re serving as a backup, you also don’t want to increase your risk by dealing with an irresponsible borrower.
Your Relationship Could Be Affected
If the borrower fails to keep up their end of the bargain, this could strain your relationship. Keep this in mind before signing on the dotted line.
Your Ability To Get A Loan Could Be Affected
Your ability to get a loan can be negatively affected if you’re a guarantor and the borrower defaults, especially if you don’t step in to make payments. Then, the lender can go after you for the debt, which will be reported on your credit file as if it were your own loan.
Find Out If You Can Remove Yourself From the Agreement
When you sign as a guarantor, you’re entering into a legally binding contract with the lender. If you change your mind about the situation, you usually can’t back out of the deal, unless the lender agrees or the loan is fully paid off.
Learn more: Should You Cosign A Loan? The Good And The Bad
How Long Does A Guarantor’s Responsibility Last?
A guarantor’s responsibility typically lasts until the loan is paid in full, unless the lender releases the guarantor from the agreement. The exact length depends on the terms of the loan contract. It’s essential for anyone considering becoming a guarantor to carefully read the contract to fully understand their obligations and commitment before signing.
Final Thoughts
A guarantor can be a lifeline for borrowers who can’t secure a loan on their own merit. But guarantors assume a lot of risk that should be considered. Whether you’re a borrower in need of help getting a loan or a guarantor considering backing a friend or family member, be sure to assess all potential drawbacks before signing a loan contract.
