Requirements To Be A Loan Guarantor

Requirements To Be A Loan Guarantor

Written by Lisa Rennie
Fact-checked by Caitlin Wood
Last Updated May 18, 2022

Not all Canadians have the financial credentials to be able to get approved for a loan. Many lenders like to deal exclusively with those who have good credit and sound financial history. If a borrower doesn’t meet those criteria, they may be rejected or get stuck with a loan that has a high cost.

In these cases, borrowers who can’t secure a loan on their own may look for someone to be a guarantor for their loan in order to ensure approval and better loan terms. But what is a guarantor and is it a good idea? 

What Is A Guarantor For A Loan?

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 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. 

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. 

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

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 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 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.

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.

Bottom Line

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 it may allow them to get a loan, that too with better terms. 


Rating of 5/5 based on 20 votes.

Lisa has been working as a 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. She's used a variety of financial tools over the years and is currently growing her money with Wealthsimple, while stashing some capital in a liquid high-interest savings account so that she always has a financial cushion to fall back on. She's also been avidly using her Aeroplan TD credit card to collect as many Aeroplan points as possible to put towards her travels!

Click on the star to rate it!

How useful was this post?

Research & Compare

Canada's Loan Comparison Platform

Largest Lender Network In Canada

Save time and money with Loans Canada. Research and compare lenders before you apply. Share your experiences with Canada's top lenders.

Make Smarter Borrowing Decisions

Whether you have good credit or poor credit, building financial awareness is the best way to save. Find tips, guides and tools to make better financial decisions.

Save With Loans Canada

Special Offers

50 Free Trades Offer

50 Free Trades Offer
Ends August 31st, 2022

Almost $500 in commission-free trades. Code “50TRADESFREE”. Conditions apply.

View Offer
Earn 5% Cash Back With Neo

Earn 5% Cash Back With Neo
No annual fee!

Earn an average 5%¹ cash back at thousands of partners and at least 1%² cashback guaranteed.

View Offer
Build Credit With Refresh

Build Credit With Refresh
Popular

Build credit while spending money with the Refresh Financial VISA card.

View Offer
Build Credit For $7/Month

Build Credit For $7/Month
Popular

With KOHO’s prepaid card you can build a better credit score for just $7/month.

View Offer
Industry Spotlight

What's happening with Canada's credit industry?

addy ⎯ Making Real Estate Accessible To All Canadians

addy ⎯ Making Real Estate Accessible To All Canadians

Check out our interview with addy; a platform that allows Canadians to invest in different properties across Canada with as little as $1.

Read Post
Locator
Find The Best Rate
In Your Region
OR
Best Personal Loan Provider by Greedy Rates
Icon

Confidential & risk-free

All consultations and conversations with Loans Canada and its partners are confidential and risk-free. Speak with a trusted specialist today and see how we can help you achieve your financial goals faster. Loans Canada and its partners will never ask you for an upfront fee, deposit or insurance payments on a loan. Loans Canada is not a mortgage broker and does not arrange mortgage loans or any other type of financial service.

When you apply for a Loans Canada service, our website simply refers your request to qualified third party providers who can assist you with your search. Loans Canada may receive compensation from the offers shown on its website.

Only provide your information to trusted sources and be aware of online phishing scams and the risks associated with them, including identity theft and financial loss. Nothing on this website constitutes professional and/or financial advice.

Your data is protected and your connection is encrypted.

Loans Canada Services Are 100% Free. Disclaimer

Keep Track Of Your Credit Score

Subscribe with Credit Verify to monitor your credit rating and get your free credit score.