According to recent research, more than one-quarter of Canadians planned to take out a personal loan in 2022; 65% of adults surveyed had already taken out a personal loan in their lifetime. Though they often get a bad rap, personal loans are critical financial tools for people who find themselves in a tight spot. Medical bills, unexpected expenses or a drop in income can all cause financial distress without warning. However, while many Canadians plan to take out a personal loan, it is out of reach for many applicants.
Low credit and no credit are the two main reasons applicants receive loan denials. Because personal loans are often unsecured, lenders like to see that a borrower is creditworthy. While every lender has different requirements, a good borrower will have the following:
- A credit score of 650 or higher
- Evidence of a steady stream of income
- Proof of employment
- A sufficient credit history
- A low debt-to-income ratio
If, for whatever reason, a lender determines that you are not creditworthy, don’t give up just yet. You may be able to get a loan with a guarantor.
A Brief Overview of Guarantor Loans
Not to be confused with a cosigner or co-borrower, a guarantor is a third party who promises to repay your loan in the event that you default. This person must have a strong credit history and score and be willing to vouch for you. Though a guarantor can be anyone, most are family members or trusted friends of the primary borrower.
Like with a cosigner, a guarantor becomes legally obligated to repay a loan if the primary borrower defaults. Unlike a cosigner, a lender can only pursue the guarantor once it exhausts all collection efforts against the primary borrower.
When Should You Look Into Using a Guarantor?
Most people only consider adding a guarantor after receiving a denial on a loan application. While a denial in and of itself won’t ding your credit score, the hard pull that came before it will. If you desperately need the extra funds but want to avoid multiple hard pulls on your credit, consider if a guarantor can help you before you submit the initial application. Below are three instances in which you may need a guarantee:
- Your Credit Score Is Less Than Ideal: The most obvious reason to find a guarantor is if your credit score is considered fair or poor. A poor credit score is less than 580, while a fair score is between 580 and 669. Unless your score is on the verge of breaking into the good category, it may hinder you from getting approved. Adding a guarantor with good to excellent credit and positive credit history may help you secure the funds you need.
- You Need a Large Loan: While your credit score may be sufficient to get approved for a small personal loan, it may not be enough. If you need a larger amount, applying for your loan with a guarantor may help to boost your income and therefore help you qualify for more.
- You Want To Avoid A Credit Pull: If you add a guarantor at the beginning of your loan application, the lender may not have to pull your credit at all. You may prefer this method if you have less than favorable history on your credit report, or you want to avoid a hard pull on your credit.
These are all great reasons to use a guarantor if you need funds quickly. However, there is one additional benefit to using a guarantee that many borrowers overlook.
A Guarantor Can Help Your Credit Score
Using a guarantor can help you get a loan, but also help you improve your credit. Credit is one of the many paradoxes of life in that you need credit to build credit. More precisely, you need credit to prove that you can use it responsibly.
If your credit score prohibits you from obtaining an affordable loan, you have little opportunity to prove that you can make on-time payments. However, if a friend or family member is willing to vouch for you, you can boost your credit score by doing what lenders denied you the opportunity to do on your own: Make timely and in-full payments.
Of course, the opposite is true as well. If you default on the loan or routinely make late payments, your score will fall even more. Not only that, but so will the guarantor’s. For this reason, you should never look into guarantor loans until and unless you’re financially responsible enough to handle one.
Can You Eventually Remove a Guarantor?
Unfortunately, in the case of most guarantor loans, you cannot remove your supporter. That said, some lenders are willing to reassess halfway through the loan or once you pay down a certain amount. If you plan to remove the guarantor in the middle of the loan term, this is something you should discuss with lenders before applying.
Personal loans can be useful financial tools, but they’re not always easy to obtain. If you struggle to get financing because of your credit or financial situation, look into guarantor loans or consider other bad credit alternatives. If you’d like to understand what loan options are available to you on your own, complete our personal loan application here. There will be no impact on your credit and it will show you what loan rates and terms you can attain without help.