How does guarantor car finance work?

If you’re dreaming of hitting the open road in a new set of wheels, car finance can get you there without having to cough up the full price upfront. But, if your credit score is on the lower side, you might struggle to get the best deals or even be accepted in the first place. 

Luckily, there are many roads to owning your dream car, and if you’re struggling to get a decent car finance deal on your own, guarantor car finance might be the solution you’re looking for.

What is guarantor car finance?

In a nutshell, guarantor car finance is when you add another person to your car finance contract. This other person is called the ‘guarantor’ and they’re responsible for paying your debt if you can’t. Think of them as a safety net, in case life throws you a curveball and you can’t keep up your repayments.

Having a guarantor on board can make you more likely to be approved for car finance, because it makes you less risky for the lender. If your credit score is low, or if you don’t yet have much of a credit history, or if your income is unpredictable because you’re self-employed, a lender may not feel confident that you’ll definitely be able to make all your monthly repayments. But having a guarantor - someone who agrees to pay if you can’t - is like having a back-up plan, and will give the lender the confidence they need, so you’ll have a better chance of being accepted.

The question is - who do you choose? Before you start auditioning guarantors-to-be, bear in mind you need to pick someone you really trust. It has to be someone who understands what they’re signing up for, and who would be happy to step in and pay your loan if you weren’t able to. Lots of people choose a close friend or a family member, like a parent.

The lender will have an opinion on who makes a good guarantor too, so it can’t be just anyone. Generally speaking, a guarantor should be at least 21 years old (or 18 for some lenders), and have a good credit rating and credit history, to show that they can repay all their own debts. It usually helps if they own their own home too, especially if they keep on top of their mortgage payments.

Pros and cons of guarantor car finance

Reckon guarantor car finance sounds like a sweet deal? It can be the perfect option for some, but make sure you weigh up these pros and cons before you jump in. 

Pros of guarantor car finance

You could have more chance of being approved

If you have a guarantor when you apply for car finance, you have a better chance of being approved. This is because the guarantor is a kind of safety net, so the lender knows that your payments will still be covered even if you can’t pay them yourself

You could get a better interest rate

Your guarantor will probably have a higher credit score than you, which can open you up to getting a loan with lower interest rates - and this would bring down your monthly repayments.

You can build your credit score

Keeping on top of your monthly repayments is a great way to build up a track record of managing your finances well - especially if you don’t have much credit history yet, or if your score is lower than you’d like.

You could borrow more

With a guarantor by your side, you might be eligible to borrow more money than you’d be able to on your own, which could give you the chance to buy a bigger or more expensive car.

It’s handy for young drivers

Getting car finance can be tricky if you’re starting out, and haven’t yet built up much of a credit history, but having a guarantor can help get you on your way.

You could have more choice

Being backed up by a guarantor will likely give you more car finance options to choose from, meaning you can shop around for the best deal you can find.

Cons of guarantor car finance

It’s a big ask

Asking someone to be a guarantor on your car finance is a big deal, as they’ll be legally responsible for paying your debt if you can’t make the payments yourself.

It could harm your relationship

Even the strongest relationships can crack under the strain of money matters, as it’s one of the biggest causes of arguments, even within families.

It could affect the guarantor’s credit score

If you miss repayments, it could harm your guarantor’s credit score as well as your own, because any late payments or defaults will be reported on the guarantor’s credit report as well as yours.

It could limit the guarantor’s options

If your guarantor wants to take out a loan or credit card for themselves, they may not have as many options to choose from. Even if they don’t have to step in and pay your debt, lenders will likely take the fact they’re acting as a guarantor as part of their financial obligations, meaning they could miss out on better deals they might otherwise have been able to get.

It could have legal consequences

If you don’t make payments on your loan, the lender could potentially take legal action against both you and your guarantor to recover the money they’re owed. This could mean having to pay legal fees, go through court proceedings, and deal with a lot of stress.

You might rely too much on your guarantor

There’s an argument that relying on a guarantor means you might not develop your own sense of financial responsibility. On the other hand, you might be extra keen to make all the payments yourself, so your guarantor doesn’t have to.

Who should consider guarantor car finance?

Guarantor car finance can be a great way to pay for a new ride if you don’t quite fit the criteria of a ‘perfect’ candidate for regular car finance. 

This might be because your credit score is on the low side, or you might have had some money troubles in the past. On the other hand, you may not have much of a past to go on - plenty of younger people struggle to get approved for car finance because they haven’t had time to build up a good credit history. If this is you, guarantor car finance may be a handy way to get the car you want, and start building up a good track record of managing your money.

If you work for yourself, you may be the king or queen of your own destiny, but you won’t necessarily bring home the same amount of money every month. This kind of unpredictable income can make lenders nervous (they’re a delicate bunch, bless them) so having a guarantor to back you up can help convince them you’re a safe bet.

What does a guarantor have to do?

If someone’s asked you to be a guarantor, they’re asking you to take on a big responsibility. And with great responsibility, comes great power - or is it the other way around? Either way, being someone’s guarantor is a big deal, and it’s not something to say yes to on a whim.

As the guarantor, you’re responsible for paying the debt if the main borrower can’t keep up the payments. Everyone starts off with the best intentions, but financial curveballs might mean that the main borrower can’t keep up their side of the deal. If this happens, the guarantor is legally obliged to cover the missed payments, plus any fees or charges that are added.

Before you agree to be a guarantor for someone, make sure you can afford to make the repayments on time, in case you do have to step in.

What are the risks of being a guarantor?

In an ideal world, everything goes smoothly and the guarantor doesn’t have to do anything. But, life can be unpredictable, which means there are some risks involved in guarantor-ing (that’s definitely a word…)

The most obvious risk is that you’ll have to pay the debt if the main borrower can’t - this is a legal responsibility, and it’s kind of a big deal. You’d have to keep making the repayments right up to the end of the agreement, so it wouldn’t just be a one off payment here and there.

If you’re acting as a guarantor for someone, it’s often because their credit score is low, and being financially associated with them could affect your own credit score. If you have big financial plans coming up, this might not be ideal for you.

Think about what might happen if you can’t cover the repayments. Your credit score would be damaged, and it could lead to falling out with the main borrower - usually a close friend or family member. 

Talking about money is notoriously awkward, but if you’re considering being a guarantor for someone, it’s important to have an honest conversation and make sure you’re both ok with the risks involved.

What about joint car finance?

Joint car finance is similar to guarantor car finance, apart from the way the responsibility is shared. 

A joint car finance agreement is when you and another person apply for car finance together, and you’re both equally responsible for covering the repayments. With guarantor car finance, the guarantor only has to pay if your circumstances change and you can’t keep up with the repayments.

Alternatives to guarantor car finance

Guarantor car finance is ideal for some people, but it’s not for everyone. The beauty of car finance is that it’s not one size fits all, so if guarantor car finance isn’t going to float your boat (or indeed, your car), there are other roads you could go down.

When you start looking for the best way to finance your new car, you’ll likely come across the option to get pre-approved car finance. This is when the lender pre-approves you for car finance, based on the details you give on your application, and a soft credit check, which doesn’t show up on your credit report. If the lender thinks you look good, they could pre-approve you, and might even tell you how much you could borrow, the interest rate you’d get, and how long your loan term could be. Pre-approval can give you a spring in your step as you check out the showrooms, and can also be super handy to help you compare car finance quotes from different lenders. 

If you’re not looking to drive off into the sunset straight away, it might be worth spending some time building up your credit score. There are plenty of ways to do this - so many, that we put them together in an awesome guide to improving your credit score - and it’ll be worth your while in the long run, as the better your credit score, the better chance you’ll have of being offered decent car finance deals on your own, without needing the back-up of a guarantor.

Currently Carmoola doesn’t offer the option to use a guarantor when you apply for car finance, however a quick search online will reveal plenty of lenders out there that could help you secure finance using a guarantor.