Trying to apply for a loan but can’t get approved? Do you think your credit is too low or your financial history is a little shaky? Have multiple lenders said no?
If you find yourself in this situation, you may want to consider a guarantor loan. Bringing someone on to help can persuade lenders to extend credit to you. However, it also comes with some nuances to be aware of. Here’s what you need to know.
Key Points
- A guarantor loan involves getting someone with strong credit and stable income to cosign a loan.
- A cosigner acts as a guarantor for the loan. They provide security for the lender by agreeing to take responsibility for the loan if the borrower defaults.
- This allows people with bad or limited credit to get approved for loans with more competitive rates and better terms.
What Is A Guarantor Loan?
A guarantor loan is a type of loan in Canada that you can borrow and repay over time. You’ll need to have someone to cosign your application, such as a trusted family member or friend.
Loan amounts available vary by lender and the financial profile of your guarantor.
Guarantor loans are designed for borrowers with bad or limited credit histories, as they’re often unable to secure a loan themselves, especially those with competitive rates.
How Does A Guarantor Loan Work?
A guarantor loan involves taking out a regular loan, but adding a guarantor to support your application. When you have a guarantor sign the loan application, the lender will use the guarantor’s financial and credit information to determine how much they’ll lend you and at what rate. Think of it as you borrowing someone else’s better credit score to secure a better loan.
If you’re approved, you’ll receive the loan and be expected to make the loan payments. But if you miss any payments, your guarantor will be responsible for making the payments, and both your credit scores will be affected. This is what gives lenders greater assurance to extend you the loan in the first place.
| Note: Not all lenders provide guarantor loans, so it’s in your best interest to find a specialized lender. |
How To Apply For Loans With A Guarantor?
You (and your guarantor) can prepare for the guarantor loan approval process by:
- Check Your Credit – Request your credit report and score from Equifax and TransUnion. If your score is over 660, a guarantor may not be necessary. However, if you have a low credit score, having a guarantor can help you qualify.
- Compare Lenders – Don’t skip researching all the available lenders. Compare options by getting pre-approved with multiple lenders.
- Gather Your Documents – Lenders may ask for several items to confirm your and your guarantor’s identity and income. This may include a government-issued photo ID, bank statements and/or pay stubs.
- Complete Your Application – Once you’re ready, you and your guarantor can apply online or in person. During the underwriting process, your lender may require additional banking or personal data before approving the loan.
| Note. Watch out for lenders that “guarantee” approval. If they promise to approve your loan without even looking at your credentials or the credentials of your guarantor, they’re likely a scammer or a predatory lender. Steer clear of lenders who make these outrageous promises. |
What Do You Need To Qualify For Loans With A Guarantor In Canada?
Here are the general requirements to get a guarantor loan (for you and your guarantor):
- Have a Canadian address and be past your provincial/territorial age of majority
- Have a good credit score (650 – 900) and healthy payment history
- Have a stable source of income (employment, government benefits, etc.)
- Be discharged from any bankruptcies or consumer proposal
Can Anyone Be A Guarantor?
When picking a guarantor to co-sign on your loan, be sure to choose a trusted friend or family member. Ideally, the guarantor you pick should be one who is already very responsible with their own finances and loans. They should also have a track record of making timely payments and have a healthy credit score.
That said, before getting a guarantor loan, consider the potential ramifications of not being able to follow through with your payments. In particular, ask how that could affect the guarantor and your relationship with this person.
What To Look For In A Guarantor
A guarantor is someone who agrees to take responsibility for your loan payments if you can’t afford them. This is why they must be trustworthy and financially prepared. Here are some other important things to look for in a guarantor:
- Age – Your guarantor must be past the legal age of majority in the province or territory the loan is coming from (at least 18 or 19 in Canada).
- Canadian Residency – To qualify with most lenders, a guarantor also has to live in Canada as a permanent resident or citizen for an acceptable period of time.
- Reasonable Income – Next, your loan guarantor needs an average income that would sufficiently cover any payments they would have to assume if you default.
- Good Credit – Potential guarantors should have decent credit ratings too. In this case, a credit score of 660 – 900 and a solid payment history should do the trick.
- Steady Employment – If your lender sees that your guarantor is able to hold down a job and pay their living costs, your approval odds will increase.
Reasons Why Someone Might Need a Guarantor Loan
There are plenty of reasons why you might have trouble getting approved for a traditional loan and may have to resort to a guarantor loan:
- You have bad credit or little credit history
- You don’t want your credit checked
- You can’t get approved for the loan amount you need with a conventional loan
- You want to get a lower interest rate with the help of a guarantor
- You don’t have a job or receive non-traditional income (e.g. self employment or government benefits)
No Credit Check Needed
The great thing about getting a guarantor to cosign your loan is that your credit score won’t be taken into consideration. This is why this type of loan is such a great option for many Canadian consumers who are dealing with bad credit or other financial issues.
Alternatives To A Guarantor Loan
If you’re looking to apply for a guarantor loan, you need to find someone who is willing to be your guarantor. However, this isn’t an option for everyone. In such cases, you can consider these alternatives:
Bad Credit Loans
If you’re struggling to get bank financing due to bad credit, consider a bad credit loan from a private lender. They often have more flexible requirements and generally place less emphasis on your credit. Like a regular loan, you can access up to $35,000 or more with terms around 3 to 60 months.
That said, these lenders do charge higher interest rates than banks and may come with addtional fees, making them a more expensive option.
Learn more: Best Bad Credit Loans
Bree
If you’re in need of a small amount of cash to bridge the gap till your next paycheque, Bree is a great option. They offer a small line of credit up to $500 with zero interest. No credit checks are required, and you can receive your funds within 2 days after approval.
Debt Relief Services
If you’re looking for a loan due to financial hardship, consider speaking to a credit counsellor.
They can help assess your situation and provide you with a debt relief strategy to reduce your overall debt and free up more of your money that would otherwise have gone toward paying off your high-interest debt.
Bottom Line
If you’re in need of a loan but can’t get one on your own, guarantor loans may be a viable option. Just keep in mind that finding the right guarantor is just as important as finding the right lender. Trust is key when taking out a guarantor loan.
