A guarantor car loan is a type of loan where someone, known as a guarantor, agrees to back up your car loan if you cannot make the payments.
This can be helpful if you have poor credit or no credit history. The guarantor is usually someone with a better credit score who the lender trusts to make the payments if you can’t.
In Ontario, getting a car loan through a dealership might be easier if you have a guarantor to support your application.
Why You Might Need a Guarantor
If you have a low credit score or a limited credit history, getting approved for a car loan can be difficult. Lenders typically view you as a high-risk borrower, which makes them less likely to approve your loan. A guarantor helps by reducing this risk.
Since the guarantor promises to pay if you can’t, the lender feels more confident that they will get their money back. This is why a guarantor car loan is often a good option for people who might not qualify for a loan on their own.
How a Guarantor Car Loan Works
When applying for a guarantor car loan, the process is similar to a regular car loan. However, there is an extra step involving the guarantor.
The guarantor will need to provide proof of their income, credit history, and other financial details. Lenders use this information to decide if the guarantor is reliable enough to cover the loan if you default on it.
It’s important to know that the guarantor does not own the car. You are the primary borrower, and you will be making the payments. But if you miss any payments, the guarantor will be responsible for paying the loan.
Who Can Be a Guarantor?
A guarantor is usually someone close to you, like a family member or a close friend. This person should have a good credit score and be financially stable. Lenders in Ontario dealerships typically require the guarantor to meet specific criteria, such as:
- A strong credit score
- A stable income
- Residency in Canada
It’s important that the guarantor fully understands the responsibility they are taking on because if you cannot make your car loan payments, they are legally obligated to pay.
Benefits of a Guarantor Car Loan
- Easier Approval: For people with bad credit or no credit, having a guarantor can make it easier to get approved for a car loan from a dealership in Ontario.
- Better Interest Rates: Since the lender sees less risk with a guarantor involved, you may get better interest rates compared to if you were applying alone.
- Build Your Credit: By making regular payments on your guarantor car loan, you can improve your credit score over time, which will make it easier to borrow in the future without needing a guarantor.
Risks for the Guarantor
While guarantor car loans have benefits, they also come with risks—especially for the guarantor. If you cannot make the payments, the guarantor is legally required to pay. This can affect their financial stability and even damage their credit score if they are unable to make the payments.
Therefore, it’s essential to ensure you can afford the car loan before asking someone to be your guarantor.
Things to Consider
- Open Communication: Be sure to have an open and honest conversation with your guarantor. They should be fully aware of the responsibility they are taking on.
- Affordability: Only take out a loan that you can afford to pay back, even if you have a guarantor. Defaulting on the loan will strain your relationship with the guarantor and impact their credit.
- Alternative Options: Before deciding on a guarantor car loan, check other options like improving your credit score, getting a co-signer, or saving for a larger down payment to lower the loan amount.
If you’re considering a guarantor car loan, be sure to explore all your options with the dealership in Ontario to find the best plan that works for both you and your guarantor.