Even if you fail the criteria set down by a lender for a personal loan, you might still apply for a personal loan by having a guarantor, such as a parent co-sign the loan.
According to the Reserve Bank of Australia, the debt of individuals in Australia reached 190% of their yearly disposable income this March. Even with such high levels of debt there are still many Aussies that find themselves in a position where they do not qualify for a personal loan.
Who can guarantee a loan?
A guarantor loan is where a family member (i.e. parent, legal guardian, children, nephew, grandparents, or a former spouse) or a legal entity such as company or trust stands in as a guarantee for the loan. This means that if you default on the loan, the guarantor will carry the legal onus of the loan including all the extra fees, interest and charges.
What are the risk for the guarantor?
As mentioned above, the guarantor that acts as guarantee for the loan will be held liable for the debt if the borrower fails to meet the repayments. In addition, acting as guarantor could influence your chances for getting a loan yourself, being a guarantor of any facility, places this debt as a liability on your Assets & Liabilities which therefore has an effect on the affordability of the loan you may wish to take out. Furthermore, acting as a guarantor can strain personal relationships if the borrower does not repay the loan.
Ways to limit the risk for a guarantor
To limit the risk for a guarantor, the guarantee should be treated as a business agreement and emotions should be kept to the side. Getting a peer to peer loan agreement in place is way to acknowledge the arrangement and outline responsibilities. So, before signing, chat to a financial broker or a lawyer to get a better grip of what you will be getting yourself into.
Different personal loan structures where you can add a guarantor
Your first option would be a secured loan. A secured loan has the lowest risk for the applicant and guarantor, if anything was to go wrong, the financier can cover their cost by selling the vehicle. The second is an unsecured loan. No security, so therefore higher risk and higher fees. The third option, although not technically a personal loan, is an overdraft that allows you to withdraw up to a defined credit limit. There is no fixed time or assets required for an overdraft facility.