Sometimes it can be a challenge to get a car loan approved on your own. Whether you’re a young Aussie or temporary resident with little to no credit history, or your credit score has recently decreased, a guarantor car loan is an option to consider to potentially increase your chances of approval.

A guarantor car loan is when a third party, typically a family member, agrees to make repayments if the borrower defaults on the loan. There is less risk to the lender by having someone ‘back up’ a loan application, so a lender may be more likely to approve your application with a guarantor attached. 

If you’re struggling to get approval for a car loan, whether for a new car or used car, you may want to consider finding a guarantor.

How do you know if you need a guarantor?

Guarantor car loans can be useful for people who may struggle to get car finance approved, such as:

• Those with bad credit;
• New arrivals to Australia with little to no credit history;
• Pensioners;
• Centrelink benefits recipients;
• Those not employed in a full-time, permanent position; and
• Young Australians with little to no credit history.

How much can you borrow with a guarantor car loan?

Unlike with a home loan guarantor where you may be able to borrow up to 110% of the value of the property, a car loan guarantor is relatively straight forward. If your application is approved, the car loan lender will provide you with a loan amount equating to the value of the vehicle.

Having a guarantor may not allow you to borrow more funds, but it may help you to get a more competitive rate. And if any asset is offered up as security, such as the vehicle you’re looking to purchase or another asset from the guarantor, this may help you further. This is also known as a secured car loan, and if securing a low rate is important to you, it may be worthwhile considering over an unsecured loan. 

This is because car loan lenders generally reserve their more competitive interest rates for less risky borrowers. As a guarantor attached to a car loan lowers the risk to the lender that you will default, this may help you to nab a lower rate and reduce the ongoing interest charges on your car loan.

A guarantor’s role in a car loan is to be legally responsible for the full value of the loan, plus associated costs.

While it is still the responsibility of the applicant to make sure the loan, interest, fees, and charges are made, it is in the interest of the guarantor to ensure this happens. If the applicant defaults on the loan, the guarantor may be asked to pay for the remaining sum.

If the guarantor cannot afford the debt, security (such as the car or other assets) may be seized by creditors to cover the lender’s losses.

There are many things to check before volunteering as a guarantor:

• What is the loan for?
• How much is the loan?
• How often will the borrower make repayments? (weekly/fortnightly/monthly)
• Will this loan impact the guarantor’s credit rating?

Who can go guarantor for a car loan?

Anyone can go guarantor on a car loan, assuming they can meet the eligibility criteria for the car loan set by the provider. However, it is in your best interest and the interest of the guarantor to try and limit this to close family members, such as parents.

This is because a car loan is a significant financial responsibility, and if you are unable to meet repayments or defaults, this will adversely impact the credit history and credit score of the applicant and the guarantor. Further, you could seriously jeopardise the relationship you have with said guarantor if this occurs, so it’s best to not include your friends or your boss as a guarantor.

What happens if a guarantor changes their mind?

It’s a hard situation, but it is possible for your guarantor to change their mind. There are strict circumstances that allow for the loan guarantor to jump ship and exit the loan, including:

• Your guarantor may get out of the loan before you receive any money from the lender.
• They can also get out before notice has been sent from the lender accepting your application.
• The guarantor can also drop out if the finalised contract for the loan is different from the original document signed by the guarantor.

Keep in mind that guarantors do not hold any right to own the items bought with the loan. If you are a guarantor and you wish to get out of a guarantor loan, you should seek legal and financial advice before proceeding.

What happens if you and the guarantor both cannot repay the car loan?

In the event that you are unable to repay the car loan, the guarantor would be responsible for servicing the repayments. In the unfortunate event that both the guarantor and the applicant could not repay the loan, there is a risk of default.

If the vehicle was offered up as security for the loan, this may be seized by the lender to help repay the debt, as well as any other assets secured by the guarantor. This would be reflected in the credit history of both the applicant and the guarantor as a default and may seriously hurt your credit scores.

Can you remove a guarantor from a car loan?

Whether due to a changed financial situation or personal reasons, you may find that you need to remove your guarantor from your car loan.

However, if you both have signed into legal agreement to repay the vehicle loan, it can be difficult to remove a guarantor yourself. Typically, as listed above the guarantor would need to request to drop from the loan before you receive the funds or receive formal approval.

If you have already received funds for the car loan or have been making repayments, you may need to consider refinancing to remove the guarantor. However, you will still need to meet the eligibility criteria set by the lender to be approved on your own

Ideally, you may try to do this once you’ve been making regular repayments for some time and have started to boost your credit score

In Australia, both the applicant and the guarantor will need to meet the eligibility criteria set by a car loan lender to gain approval for the vehicle funds. This may include:

• Both are over the age of 18.
• One or both are Australian citizens, permanent residents, or have an appropriate visa.
• The applicant and guarantor’s combined incomes meet the income minimum.
• The applicant or guarantor’s credit rating meets the lenders minimum (typically a good to excellent credit score).

As guarantor car loans are generally recommended to those with little to no credit history or poor credit scores, your guarantor must be able to prove they have a good financial record. This includes a good credit rating and being currently employed, preferably on a full-time basis. This may help the car loan lenders to see the application as supported by reliable borrowers and improve your chances of loan approval.

Generally speaking, it can. A car loan lender may offer you a lower interest rate, or more competitive car loan with money saving features, if you have a guarantor.

Lenders favour applicants with high credit scores, positive credit history and stable employment/income. The benefit of a guarantor car loan is that you will be seen as a “less risky borrower” to lenders, and there is less risk to the lender if you have someone ‘back up’ a loan application.

By being offered a lower interest rate than if you applied on your own, you may save hundreds in interest charges over the car loan term. Further, if you’re given access to features, such as the ability to make extra repayments, when utilised this may help you to reduce the principal owing and therefore pay less interest.

Further, if you do pay the loan off in full, this will reflect positively on your credit history. That means it may be easier to get financial products such as credit cards or a home loan in the future.

What are the alternatives to a guarantor car loan?

If you’re struggling to get approval for funds to pay for a car, you may also be rejected from other financial product applications, such as a credit card or personal loan.

Instead, it may be worth considering this alternative to a guarantor car loan: a co-borrower loan. A co-borrower loan is just a joint loan, meaning the person who signs up as a co-borrower shares equal responsibility to pay off the loan.

A co-borrower is subject to the same financial and legal ramifications as you in the event of any missed payments or default. But where a guarantor only pays off a loan when the borrower defaults, co-borrowers are equally responsible for meeting ongoing weekly, fortnightly, or monthly repayments.