What is a Guarantor Loan?

What is a Guarantor Loan?

Written by Lisa Rennie
Fact-checked by Caitlin Wood
Last Updated February 28, 2020

Not everyone is able to get approved for a loan on their own. Based on their financial backgrounds, some borrowers may have trouble securing a loan without some help from others. Lenders may not feel confident about extending credit to borrowers if it is believed that the borrowers will not be able to make their monthly payments on time.

What happens when you can’t make your loan payments on time? Find out here.  

In these cases, having a guarantor cosign on the loan may be just what’s needed to get that loan application approved.

What is a Guarantor Loan?

A guarantor loan involves a guarantor co-signing the loan contract. In the case where a borrower does not have the financial health or credentials to secure a loan on their own, a guarantor with healthy financials may be able to cosign the agreement.

A guarantor is an individual who agrees to take over the loan payments if the borrower defaults on the loan. Essentially, the guarantor will be on the hook if the borrower is not able to keep up with the payments. As such, the guarantor is being placed in a position of risk if the borrower is not trustworthy or reliable. For this reason, it’s important for potential guarantors to make sure that the person they are cosigning for is capable and responsible enough to make the loan payments.

Click here to learn some of the good and bad aspects of becoming a co-signer.  

Does a Guarantor Loan Require a Credit Check?

One of the best things about guarantor loans is that you won’t be judged based on your credit score. Getting approved for a guarantor loan is based on your ability to repay the loan and find a cosigner who is reliable and also has the ability to repay the loan, should you, the borrow, become unable to do so.

The True Cost of BorrowingCheck out this infographic to learn all about the true cost of borrowing. 

Joint Borrower vs. Guarantor

A guarantor is a person who cosigns a loan in an effort to help the borrower get approved for the loan. However, this type of person differs from joint borrowers or co-borrowers. Joint borrowers are those who are borrowing money in conjunction with another borrower.

For instance, spouses who buy a home together and take out a mortgage will have both their names on the home loan. A co-borrower is the person that another individual is borrowing money with and means that both borrowers owe the entire loan together.

For some pros and cons of joint mortgages, read this.

A co-borrower is on the hook to repay the entire loan amount with the second borrower, regardless of whether or not that borrower defaults. Both borrowers have the same legal and financial obligation to repay the loan as if they had taken out the loan on their own.

On The Other Hand, a Guarantor…

Signs a contract of guarantee for a borrower which makes the guarantor obligated to abide by the terms in the loan contract, but they do not actually own the loan. If the borrower defaults on the loan, the terms of the contract will require that the guarantor must repay the money owed by the borrower.

The biggest difference between a joint borrower and guarantor is that the joint borrower is always responsible for payment, regardless of whether or not the other borrower repays the loan.

On the other hand, a guarantor is not liable until the borrower defaults on the loan and the lender has taken all required measures to recoup the money. In this case, the lender must be able to prove that the principal borrower defaulted on the loan.

Wondering what happens if you miss a mortgage payment? Take a look at this.

Reasons Why Someone Would Need a Guarantor For Loan Approval

There are plenty of reasons why someone may find it difficult to get approved for a loan without any outside help, including the following:

Past financial mistakes – If you’ve been irresponsible with your money over the past, lenders may be uneasy about extending credit to you.

Look here to see some ways of improving your credit.

Bad credit – Many issues can cause your credit score to plummet, including repeated missed debt payments and excessive credit utilization. Lenders do not look favourably on borrowers with bad credit scores, making loan approval much more difficult.

Borrowers don’t want their credit checked – If borrowers think their credit report will show several blemishes on their financial record, they may not authorize lenders to have their credit checked. Lenders will certainly want to check a borrower’s credit report before extending a loan, and failure to do so could result in a rejected loan application.

Regardless of why a borrower is unable to get approved for a loan on their own, a guarantor who co-signs the agreement can increase the odds of loan approval.

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How a Guarantor Loan Can Help a Consumer

If you find yourself requiring some assistance in getting approved for a loan, you may be considering having a guarantor co-sign a loan on your behalf. There are several benefits that you can take advantage of by having a guarantor co-sign a loan for you:

Help you get access to the financing you need – The most obvious benefit of getting someone to be a guarantor on your behalf is being able to get approved for financing. If you’re in need of a loan, you clearly need some financial assistance to cover a pressing expense. In this case, a guarantor can help you get your hands on the extra funds you need without fear of having your application rejected.

Take advantage of better loan terms and conditions – Sometimes borrowers may be able to get approved for a loan, but because of their shaky financial past, they may not be able to get favourable terms and conditions. For instance, a borrower with bad credit may be offered a high-interest rate, which can make the loan more expensive. With a guarantor, the lender may be willing to offer a much lower interest rate in exchange for a less risky loan agreement.

Trying to understand how your lenders set their interest rates? Check this out.

Improve their credit score – Borrowers with bad credit can do a few things to improve their scores, including making debt payments on time and in full. By getting the opportunity to have to make regular loan payments, borrowers can effectively boost their credit scores. However, the opposite can also happen, so borrowers must be entirely certain that they will be able to make their payments without any trouble.

Look here to find out if you can use your credit card to improve your credit score.

How to Find the Right Guarantor

Not everyone will necessarily be willing to be a guarantor on a loan. After all, it’s a huge responsibility and a big risk, especially if the borrower is not responsible with their finances.

If you are in need of a loan but are unable to qualify for one on your own, you may need a guarantor to help you out. But just as risky as this situation may be for the guarantor, it can also be risky for you too if you don’t choose the right person to act as a guarantor on your behalf.

Ideally, the guarantor you choose will be someone who you trust and can count on. You want them to be able to step up to the plate in case you fall on hard times.

Furthermore, the person you choose to be a guarantor on your behalf must be in good financial standing and have good credit. Lenders will not want anyone with bad credit as a guarantor on a loan because they will be less likely to cover the loan payment. The guarantor should also not have any past bankruptcies, as this will likely get in the way of the lender accepting this person as a guarantor.

Trying to remove yourself as a co-signer on a loan? Read this first.

What are a Guarantor’s Responsibilities?

Anyone who agrees to be a guarantor is being put in a potentially heavy situation. The financial responsibilities are quite robust, so the guarantor must be fully aware of their obligations and be entirely comfortable with the role they are taking on.

The main responsibility of a guarantor is to take over the loan payments if the borrower is unable to. This is why guarantors are assessed by lenders before they are able to take on this role.

The guarantor should also make their own assessment of the borrower to ensure they are financially capable of making their loan payments and are responsible enough to put their income towards covering their payments rather than spending it on other frivolous expenses.

Whether the borrower stops making the loan payments for whatever reason, goes bankrupt, or even passes away, the guarantor will be solely responsible for the loan payments until the loan is entirely paid off.

Final Thoughts

Both borrowers and guarantors have a lot to consider before agreeing to a loan contract with a guarantor’s signature on it. If a borrower absolutely must have a guarantor in order to get approved for a loan, it’s important to work with a lender who is well versed in these types of situations. Call Loans Canada today to help you find the right loan product and lender for you.

Rating of 5/5 based on 3 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!

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