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Loans are an essential tool for most adults. Whether you’re looking to buy a house, need a personal loan to cover an unexpected expense or a loan to help consolidate debt.

But, the truth is, not everyone can get approved for a loan on their own.

This is when you may consider asking a trusted friend or family member to be your loan guarantor. Not everyone is eligible to be a loan guarantor. This is why it’s important to understand what the requirements are and what a loan guarantor is responsible for.

What Is A Loan Guarantor?

A guarantor is someone who backs up someone taking out a loan and agrees to take responsibility for the loan payments in the event the borrower defaults on the loan. Guarantors are usually required if the primary borrower has credit issues, but still has the income needed to support loan payments. Bad credit can stand in the way of a borrower securing a loan, despite their income.

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. This may include the following:

  • Residency – Have a Canadian address and have lived in Canada for a certain period of time
  • Age – Be the age of majority
  • Credit Score – Have a good credit score of at least 650 or higher 
  • Income – Earn a sufficient and stable income that can cover the loan payments in the event the borrower defaults. You’ll likely need to provide documentation to prove your income level and job stability. 

Ultimately, the guarantor must be willing to take over the loan if the borrower defaults at some point. That means, if the borrower is unable to continue making payments, the guarantor will take responsibility to repay the full loan amount according to the terms written in the contract. 

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, letter of employment, statement of assets, and identification. 
  • Sign Guarantee Document – If the lender approves you as a guarantor, you’ll need to sign a document in front of a lawyer to make it legally binding.

Pro Tip – Before signing the agreement, request a copy of the loan agreement and all other documents that the borrower signs and make sure you understand all terms. Some important things to verify include:

  • Whether or not 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 you would be required to take over the loan

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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 isn’t actually on the home title and does not have the same property rights as a co-signer would. 

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 on a monthly basis in order 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 does not. Should the borrower file for bankruptcy, stop making payments, or pass away, the guarantor would then become responsible for each monthly payment until the loan has been completely repaid in full.

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.  

If the borrower were to default on the loan, the cosigner would be legally liable to repay the mortgage. Moreover, their own assets could be seized to recoup payment.

Do Guarantors Need A Credit Check? 

One of the requirements to become a guarantor is to have good credit. In order to verify the guarantor’s credit, lenders will perform a credit check. Doing so will allow the lender to determine whether the guarantor is creditworthy enough to assume the loan payments if the original borrower defaults on the loan. 

What Are The Benefits Of Being A Guarantor?

While there are certain risks associated with being a guarantor, there are also plenty of benefits that you may be able to take advantage of, including the following:

  • Help someone out without actually lending the money yourself
  • Improve your credit if the borrower makes payments on time
  • Help improve the credit of the borrower if timely payments are made
  • Give the borrower some level of responsibility

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. If you are not comfortable with the possibility that you’ll have additional loan payments to make, then you may want to rethink the notion of 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. And if you fail to cover the payments, your credit scores may be negatively affected.

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.

Questions To Ask Before Agreeing To Become A Loan Guarantor

Becoming a guarantor is a big step to take and comes with plenty of responsibilities and risks. Given the potential risk, it is important for anyone who is considering becoming a guarantor to ask a number of questions first, including the following:

  • Do you trust the borrower to always make their payments on time?
  • Why does the borrower need a guarantor?
  • Can you afford to cover any missed payments?
  • Can you afford to cover the entire cost of the loan?
  • Can you trust the borrower to pay back the loan on time?
  • Are you worried that being a guarantor for a friend or family member might ruin your relationship?
  • Will being a guarantor affect your ability to secure your own loan in the future?
  • Will you have to put up your own assets as security?
  • What is the loan amount that you will be guaranteeing?
  • Can you take yourself off the contract at some point in the future?

The answers to these questions will help you make a more informed decision about whether or not to become a guarantor for someone you know who may be having trouble securing a loan on their own. Only when you are satisfied with these answers and you’re in the right financial position should you consider being a guarantor.

Should You Be A Loan Guarantor?

A guarantor can be extremely advantageous to borrowers looking to secure a loan, however, as the guarantor, it’s important to consider the risks. There aren’t many benefits to being a guarantor aside from helping someone you love and the potential positive impacts it may have on your credit. Guarantor loans are more beneficial for the borrower as they may allow them to get a loan, that too with better terms. 

Guarantor Loan FAQs

Does a guarantor have to be working?

Technically speaking, no, a guarantor does not need to be employed. But, keep in mind that for a guarantor to be approved, the lender needs to believe that they will have no problem making any payment that the main borrower may miss. For the average consumer, being able to afford a loan payment means being employed or having some form of income.

Will becoming a loan guarantor affect my credit? 

As mentioned, becoming a guarantor can negatively affect your credit scores if the borrower defaults on the loan. If you do not make the payments yourself once you take over, your credit scores may be impacted in the same way that missing payments on any other loan account would.

Can I pull out from being a guarantor? 

The only way to get out of being a guarantor is to repay the loan in full, whether it’s paid off by the original borrower or yourself after taking over the loan.
Lisa Rennie avatar on Loans Canada
Lisa Rennie

Lisa has been working as a personal finance writer for more than a decade, creating unique content that helps to educate Canadian consumers in the realms of real estate, mortgages, investing and financial health. For years, she held her real estate license in Toronto, Ontario before giving it up to pursue writing within this realm and related niches. Lisa is very serious about smart money management and helping others do the same.

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