When you apply for a loan, the lender would most certainly want to make sure that you can repay it, even under the worst circumstances.
While not all senior loans require any forms of guarantee or security for the lender, many of them do, especially if the borrower has a bad credit history or no official type of employment with a fixed income.
In this article, we’ll help you understand what a guarantor loan is, as well as everything you need to account for before and after you apply for it.
How Does a Guarantor Loan Work?
A guarantor loan is an emergency loan where the lender allows a family member (the guarantor) to agree on repaying the borrower’s debt if they default on the repayments. The guarantor may also use their property as a guarantee.
This property can either be a house, car, or even a yacht. In some cases, the property doesn’t have to be of the same value of the loan; your relative can secure only part of the loan with a property, but if the margin is huge, there’s a higher risk that your cash loan for pensioners could get rejected.
Generally, the guarantor has a better credit score than their relative, providing additional security for the lender. Fill our our online loan application today.
Guarantor Loan Requirements
Before applying for a guarantor small business loan, make sure that your relative meets the following requirements:
- Be an Australian citizen or a permanent resident
- Be between 18-65 years old
- Have a stable job with a fixed monthly income
- Have equity in the property used to secure the loan with private finance money Australia
- The property must be on Australian land
However, keep in mind that the requirements may vary slightly depending on the lending entity. For example, some lenders may accept loan requests from retirees aged 65+.
Types of Guarantor Loans
There are two types of guarantor loans: secured and unsecured. A secured guarantor loan is when the guarantor provides their property as collateral so that when the borrower can’t repay the loan, the lender can claim ownership of the property.
On the other hand, an unsecured guarantor loan is co-signed by the guarantor, but they don’t have to use their property as collateral. A good credit score and stable income would be sufficient.
Both types of guarantor loans have their benefits and risks, which can be summed up as follows.
Secured Guarantor Loans
Secured guarantor loans are beneficial for both the lender and borrower. If the borrower couldn’t repay the loan, the lending entity will sell the guarantor’s property to get the money back, making this type more secure for the lender. Also, the borrower won’t have to spend jail time. Not to mention, no credit check loans have lower interest rates than unsecured ones.
On the flip side, a secured guarantor loan for financier are bad for the guarantor because they’ll lose their property if the borrower couldn’t make the repayments on time. However, immediate family members will usually prefer to lose their property over letting their relative go behind bars.
Unsecured Guarantor Loans
Unsecured guarantor personal loan bad credit is riskier for the borrower and lender alike. If the borrower defaults the payments, the bank won’t have an alternative to get its money back. In that case, the borrower will spend jail-time. Not to mention, unsecured guarantor loans have higher interest rates.
The only benefit of unsecured guarantor loans is that the guarantor won’t lose their property when things go wrong.
Here are the most common types of guarantees used in guarantor loans:
This type of guarantee is used by most first-time homebuyers is a security guarantee. A security guarantor loan is an excellent choice for borrowers who have an impressive credit score but no relevant bank deposits. In this case, the borrower uses their guarantor’s property to secure the loan.
This type is similar to the previous one; the only difference is that the borrower uses a property that can only partially cover the loan’s value.
While this type has several advantages, including reduced liability and limited exposure to your mortgage by the lender, it can be risky when things don’t go as expected, since the borrower may not be able to cover the rest of the loan’s value.
You’ve probably guessed it already; a family guarantee is when an immediate family member, like the father, mother, spouse, or brother/sister of the borrower, guarantees the loan. However, your family member must have equity in their property. It’s also preferable that they still have at least a few years left before retirement.
Security and Income
This guarantee type is the go-to solution for parents who want to buy property for their children, mostly students who don’t have income sources and can’t afford to buy a property on their own. The lender uses the parent’s property to guarantee that the child will repay the online payday loans on time.
Benefits of a Guarantor Loan
There are countless benefits that a guarantor loan can give you, including:
- Buying a new property in full without having to opt for high-interest instalment plans
- Unlike other types of loans, guarantor loans don’t require an LMI (Lender’s Mortgage Insurance)
- Doesn’t require a perfect credit score
- Have lower interest rates than other loan types
Risks of a Guarantor Loan
Before applying for a guarantor loan, you need to be aware of all the potential risks to plan everything out. Here’s a quick overview of them:
- Your relative may lose their property if you don’t manage to repay the loan
- Your relative can’t sell their property if they needed to do so
- Salary cuts and job losses are pretty common, increasing the risk of being in default
It’s worth mentioning that the borrower must be honest with their guarantor about everything that’s even remotely related to the loan. For instance, if the borrower isn’t making their EMI payments regularly, the lending entity won’t likely inform the guarantor.
In that case, the borrower is responsible for informing their guarantor to avoid damaging their relationship later.
After getting a guarantor loan, the borrower may want to eliminate the guarantor down the line. This can be necessary for several reasons. For example, the guarantor may find themselves in debt, which means that they can no longer help the borrower with their bad credit personal loan guaranteed approval no bank account.
Moreover, the guarantor may lose their trust in the borrower’s ability to make the payments on time every month. In that case, the guarantor may ask the borrower to remove them, but the lending entity won’t approve unless the following conditions are met:
- Sufficient proof that the borrower can make the payments on their own
- The borrower must be consistent with the payments over the previous 6 months
- The loan’s value is less than 90% of the property’s value
We hope that, by now, you’ve developed a good understanding of guarantor loans, in addition to their benefits, risks, and requirements.
As a final piece of advice, take time to think about how you’ll repay your loan in the specified time interval. After all, you probably don’t want to hurt your relationship with your guarantor or make them lose their valuable property. You can personal loan online apply with Perfect Payday today.