Guarantor Loans

What is a guarantor loan?
Who are guarantor loans used by?
How do guarantor loans compare to other personal loans?
How do I qualify for a guarantor loan in Canada?
Do I have to be employed to be eligible for a guarantor loan?
Who can be a guarantor on a loan?
How much does a guarantor loan cost?
Who offers guarantor loans in Canada?
How long does it take to receive a guarantor loan?
What can I do if I cannot find a guarantor?
What are the guarantor’s responsibilities?
Can a guarantor withdraw their guarantee?
What happens if neither the borrower nor the guarantor can pay back the loan?
How to apply for a guarantor loan in Canada?

What is a guarantor loan?

A guarantor loan is available to Canadians that have a friend, family member, or someone else who trusts them to make repayments on this loan. These types of loans are typically up to $10,000 and may have higher than average interest rates, because they are given to borrowers that are considered risky by lenders, due to their credit rating and past financial history.

Guarantors take on a responsibility when they vouch for the borrower. If the borrower fails to repay the loan, then the guarantor becomes responsible for the payments.

Who are guarantor loans used by?

Guarantor loans are intended for people that need a loan but are unable to get it elsewhere due to bad credit or no credit. Banks and other lenders rely on an individual’s credit history and financial standing to assess risk. If they don’t trust that the borrower will repay the loan they are asking for, then the borrower will be declined. This does not necessarily mean that the person is unable to repay the loan. Sometimes, the past credit history does not paint the full picture.

With guarantor loans, if you know someone who trusts you and is in good financial standing, this person is able to “guarantee” your loan. By having the extra security of a guarantor, a lender is now able to issue a loan without worrying about the borrower’s credit history. Because of the high risk nature of guarantor loans to the lender, the interests rates can be very high, over 40% APR (annual percentage rate). As such, guarantor loans are a “last resort” solution for many borrowers.

How do guarantor loans compare to other personal loans?

Guarantor loans are unique in their nature as they are used by people that have a hard time to get approved for a loan elsewhere, including banks, credit unions and digital lenders. Unlike other loan products, guarantor loans don’t consider the financial standing of the individual borrower, so long as they are not currently bankrupt or in consumer proposal; all they need is someone with strong credit or a homeowner to sign on as a guarantor.

	Unsecured Loan From Banks	Unsecured Loan From Online Lenders	Unsecured Loan From Guarantor Lenders
Maximum Borrow Amount	Up to $25,000	Up to $35,000	Up to $10,000
Credit Score Required	Great	Fair - Good	Doesn't Matter
Interest Rate	5% - 15%	10% - 40%	Over 40%

The figures in the above table are approximations. If taking out a loan from any provider, check all terms carefully.

How do I qualify for a guarantor loan in Canada?

There are very few requirements for a borrower to qualify for a guarantor loan. If you are a Canadian resident over 19, have a source of income, and no active bankruptcy or consumer proposal, you can qualify for a guarantor loan.

Do I have to be employed to be eligible for a guarantor loan?

Being employed helps but is not a requirement. As long as you are not in an undischarged bankruptcy or consumer proposal, you can obtain a guarantor loan. However you must have some source of income, even if its not from employment. For example, a government benefit.

Who can be a guarantor on a loan?

In many cases guarantors are friends or family members, because they trust and know you best. However, anyone can be a guarantor, including neighbours, co-workers, or even your boss. The most important important thing is that they must be willing to take on the responsibility of paying back your own, if you are unable to do so.

Guarantors need to:

Be least 19 years old
Have a Canadian address
Have a good credit history
Be able to afford to repay your loan, if you cannot pay

How much does a guarantor loan cost?

Guarantor loans are expensive compared to typical personal loans because they are higher in risk, and can be obtained even if you have very poor credit history.

How long does it take to receive a guarantor loan?

Guarantor loans can be processed very quickly, sometimes as little as 24 hours. Both the borrower and the guarantor need to submit information through an online application. The faster the information is provided, with no missing pieces, the smoother and faster the entire process will be. Some of the common aspects that can slow down the loan application is if the lender is unable to reach the guarantor or if any of the documents are incomplete.

What can I do if I cannot find a guarantor?

You cannot get a guarantor loan without a guarantor. Usually a guarantor loan is used by individuals that are having a hard time getting trusted by a bank or an online lender, and so they are declined for any loan requests. Friends and family members, your co-workers know you better, and can be in a position to vouch for you, so that you can get the money you need. However If you are having a difficult time finding anyone that would trust you to repay a loan, then it is possible that borrowing money is not the right solution for your situation.

What are the responsibilities of a guarantor?

The guarantor’s primary responsibility is to make payments on the loan, in case the borrower is unable to do so. The guarantor is liable for the loan, regardless of the reason that the borrower fails to make payments. For example, if the borrower enters into a bankruptcy or consumer proposal, simply stops making payments, leaves the country, or even passes away, the guarantor will still be responsible for the full loan amount to be repaid, plus interest.

Can a guarantor withdraw their guarantee?

To stop being a guarantor, the entire loan plus any accrued interest must be paid back to the lender.

What happens if neither the borrower nor the guarantor can pay back the loan?

In the event that neither the borrower nor the guarantor are able to make loan repayments, the loan may be passed along to a professional debt collections agency. The process of collecting payments for guarantor loans is similar to other personal loan types in Canada.

Final Thoughts

Guarantor loans are not for everyone, but when you need extra funds and banks and other lenders aren’t an option due to credit history, they offer an alternative solution. Be careful when taking on a guarantor loan – they have high interest, and will hold your guarantor responsible for payments if you are unable to repay the loan yourself.

The reason they are so popular is that a credit history (or lack of it) does not always paint the full picture about a person.

Like with any debt, it is very important to understand the math of what the interest rate means for your total cost of the loan and repayment schedule. For more information about personal loans, please click here.

Author: Vlad Sherbatov

Vlad is the President and Co-Founder of Smarter Loans, Canada’s original and largest loan comparison website. He is a passionate entrepreneur and business leader in the Canadian financial sector. He was selected as a 2019 Top 25 Leaders in Lending by the Canadian Lenders Association. Vlad is an author at Smarter Loans, and has been featured in publications like the Toronto Star and National Post, among others.

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