Struggling to get finance approved at a decent interest rate?
If you have no credit history, or a bad credit history, you may get slugged with a high interest rate if you can get approved at all.
However, if someone with a stronger credit profile was to guarantee your loan then this can help you secure more favourable terms.
While a guarantor can be the key to unlocking a better deal, it’s a serious legal commitment for the person helping you.
They are also near impossible to secure in the current regulatory environment in Australia.
In this article, we will explain how guarantor car loans work and why they are so hard to find.
We’ll also cover what lenders assess in both the borrower and the guarantor, and the real risks involved before anyone commits.
Key Takeaways: Guarantor Car Loans
| Can I Get a Guarantor Loan in Australia? | It is very difficult to secure a Guarantor Loan. Mostly due historical difficulties in enforcing 3rd party liability in Australia. |
| Financial Risk | If the primary borrower defaults, the guarantor is liable for the entire debt, legal fees, and interest. |
| Credit File Impact | A guarantor’s credit file will be affected by the default of the primary borrower, damaging future credit prospects. |
| Borrowing Capacity Impact | The borrower’s capacity to repay the debt does not increase with a guarantor. |
What is a Car Loan Guarantor?
A guarantor is a third party (usually a family member) who signs a contractual obligation to repay your car loan if you fail to make the payments.
From a lender’s perspective, this transfers risk to a stronger third party, giving them a greater chance of recovery if the loan falls into arrears.
For example, if you miss multiple payments, the lender can legally demand your guarantor cover the outstanding amount.
The Reality of Guarantor Car Loans in Australia
While the concept is great in theory, the reality is that managing guarantor loans is a nightmare for lenders.
If we think about this in practical terms you can understand why.
A young borrower asks his parents to guarantee his loan so he can get his first car. He has his first job and will definitely make all the payments.
The parents agree, their guarantee keeps the interest rate manageable so no problem.
But young people are sometimes irresponsible with money. Payments are missed, and the parents get a letter demanding repayment of the $30,000 loan.
They are (understandably) outraged!
But they also don’t want to pay. Why should they? It’s not their car, or debt.
So they complain! They don’t think they should be liable, but legally they are.
So they go to the ombudsman and a lengthy dispute process ensues that costs the lender money even though they are in the right.
Too many people agree to these arrangements without ever wanting the actual liability they are taking on.
And the regulators have been sympathetic to this view.
As a result, you will not see a guarantor loan offered by any lender anywhere. But they do still exist in the right circumstances.
So, two takeaways from this:
- You are unlikely to find a lender willing to write a guarantor loan without a broker advocating on your behalf.
- If the regulatory environment becomes more favourable to guarantor loans then a broker will be the first to know.
So, if you are seeking a guarantor loan clock below for a full assessment of your prospects to achieve this.
Differences Between a Co-Borrower and Guarantor
Liability Transfer
The key difference is in the timing of the liability transfer between each party.
A guarantor has secondary liability, meaning they only step in if you default.
Whereas a co-borrower, or joint applicant, is equally responsible for the debt from day one and is usually contributing to repayments throughout the loan term.
A guarantor in this context is also in reference to a regular consumer car loan.
In commercial finance it is common for directors to guarantee a loan to the business, but that is a whole other topic.
Accessibility
The other is whether you can actually access each type of arrangement.
Co-borrower loans are very common and we place customers in these every week.
But as discussed, a guarantor loan is as rare as hens teeth these days.
If a lender will consider a guarantee, then you will be required to prove that individual legal advice has been sought.
So the defence of “I didn’t know” won’t hold up if the guarantor does become liable one day.
When Do Lenders Require a Guarantor?
Auto finance lenders will never request a guarantor when assessing an application. They will review and make a decision on the merits of what is submitted.
It is up to the borrower to proactively include the guarantor in the application.
This should only be done when there is a genuine need to do so.
Triggers could include:
- First-time borrowers, like apprentices or young workers that need a vehicle now.
- Thin credit files, common for those new to Australia.
- Past credit mistakes that have lowered a credit score.
It is also important to note that a guarantor will not be included in any serviceability calculations.
The primary borrower must be able to demonstrate that they can afford the repayments.
So, if the motivation for a guarantor is insufficient, or irregular income, expect to be declined.
What Lenders Look for in a Guarantor
Lenders assess guarantors as a financial backstop, typically preferring a parent or close family member with a strong financial profile.
They must meet strict criteria, including:
- Being over 18 and an Australian citizen or permanent resident.
- Having a stable income and a clean credit history.
- Holding minimal existing debts to prove they can cover your loan.
An often overlooked consideration is that a guarantor’s own ability to borrow may be reduced while the guarantee is active.
This is a serious commitment they must understand before agreeing.
Understanding Risks for a Guarantor
Signing a guarantee is a serious legal commitment with significant financial and personal consequences if the borrower defaults.
Legal Commitment
If the borrower defaults, the lender can legally pursue you for the debt.
You may be liable for the entire loan balance, plus fees, interest, and legal costs.
This process follows missed payments that escalate to collections and potential legal action.
Impact on Your Financial Profile
Late payments will damage both your credit file and the borrower’s.
Even with perfect payments, lenders see the guarantee as a contingent liability, which reduces your own borrowing capacity.
Relationship Risk
Financial stress can also strain personal relationships.
Both parties must discuss worst-case scenarios before signing to protect your connection and set clear expectations.
How a Guarantor Strengthens Your Loan Application
A guarantor lowers a lender’s financial risk, strengthening your application.
This can result in higher approval odds, a larger borrowing limit, or a lower interest rate. For example, a rate drop from 12% to 9% on a $40,000 loan could save thousands over the term.
This is an illustrative outcome, not a guarantee.
A guarantor does not replace affordability checks.
You must still prove you can manage the repayments on your own income.
How to Remove a Guarantor From Your Car Loan
If you are successful in gaining approval for a guarantor loan, at some stage you are probably going need to remove that guarantee.
There two pathways to achieve this:
- Refinance the loan
- Request a formal release from the original lender, if their policy allows it.
To achieve either you will need to demonstrate:
- A solid history of on-time payments (usually 12+ months).
- An improved credit score and stable income for the primary borrower.
- A lower outstanding loan balance, reducing the lender’s exposure.
Plan this exit strategy from the start and agree with your guarantor on a target specific date to review your eligibility for a solo loan.
Alternatives if a Guarantor Isn’t an Option
If you can’t find a guarantor, focus on strengthening your own application first.
Consider these pathways:
- Reduce the loan size: Save a larger deposit or choose a more affordable car.
- Improve your credit profile: Take 90 days to clean up your bank statements and improve your credit score before applying.
- Seek specialist advice: Ask a broker about second chance lenders who are more likley to approve your application.
Frequently Asked Questions
Do guarantor car loans still exist in Australia?
Yes, guarantor car loans are still available in Australia, but they have become much less common. The third party will also have to prove they have sought individual legal advice and understand their obligations under the loan agreement.
Can a guarantor be removed from a car loan after it starts?
Removing a guarantor usually requires the primary borrower to refinance the loan on their own. To qualify, you must show a lender an improved financial position, such as a higher credit score and a stable income. Some lenders may offer a release without refinancing, but this is less common.
Does having a guarantor guarantee a lower interest rate?
No, it does not. While a guarantor significantly strengthens your application by reducing the lender’s risk, it doesn’t guarantee a specific rate. The final interest rate still depends on a combination of factors, including the primary borrower’s credit profile, the guarantor’s financial strength, and the vehicle being financed.
Does the lender contact the guarantor straight after a missed payment?
No, the lender will always pursue the primary borrower first to fix any missed payments. The guarantor is only contacted after the borrower fails to resolve the arrears. However, late payments can be recorded on both the borrower’s and the guarantor’s credit files, causing damage to both of their scores.
Guarantor Car Loans Are Rarely the Right Move
A guarantor can improve your approval odds and interest rate, but it creates a serious legal liability for them.
You will have a hard time finding a lender to agree, and your efforts may be better spent improving your own financial circumstances.
If you can wait a little longer then save a larger deposit, try and increase your earnings, and ensure you are presenting well to a future lender.
You may have to cop a more expensive car loan upfront but there are options out there.
If you would like to discuss your options then get in touch with our team of expert brokers below for an obligation free assessment.
