Being a Guarantor 

What is a guarantor?

A guarantor is someone who “guarantees” someone else’s loan or credit contract i.e. promises to repay a debt if the borrower can't or won't.

A lender may insist that a borrower has a guarantor for their loan. This is usually because the lender is concerned about the person's ability to keep up their loan repayments or the borrower is under 18 years of age. 

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What should I consider before agreeing to be a guarantor?

Being a guarantor is risky, so if you’ve been asked to be one make sure you know what the implications are.

The most important thing to remember is that if the borrower gets behind in their payments the lender has the right to chase you up for the money rather than the borrower (the person whose loan you guaranteed). They may well do this if they think it will be easier to get the money from you than from the borrower.

If you end up in financial trouble because you are the guarantor for someone else’s defaulted loan, your credit history could be affected so that you might have difficulty in getting a loan yourself.

Before you agree to be a guarantor, ask yourself:

  • why does the borrower need a guarantor (do they have a poor credit history? Is it likely they will have problems making the repayments?)
  • is the borrower responsible enough to have a loan?
  • is the loan a wise one (is it for something they really need, or could they just save up for it?)
  • would you be willing and able to pay back the loan (plus interest and debt recovery costs) if the borrower can’t or won’t do so?
  • what would you list as security, and are you willing to risk having it repossessed if the money can’t be paid back?

It’s best to seek legal advice before agreeing to be a guarantor.

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If I don’t want to be my daughter’s guarantor but I do want to help her buy her first home, what are my options?

If you have the funds, or are willing to extend your own mortgage, one alternative to becoming a guarantor is to give or lend your child money. This way you have much greater control over your potential losses if your child can’t or won’t pay back the debt.

If you do give them a loan, draw up a written, signed agreement which sets out the loan amount, how they must pay you back and whether they have to pay interest. You can purchase a loan agreement template online or ask a lawyer to draw one up for you.

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Is being a co-borrower safer than being a guarantor?

Not really. If you are a co-borrower it just means that you and someone else have jointly taken out a loan. This means you are jointly responsible for paying it back, and if one of you stops making repayments the lender can pursue either of you for the debt.

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What can I do to protect myself as a guarantor?

If you agree to be a guarantor then you are taking on a serious risk and will be responsible for paying a debt if the borrower can’t or doesn’t. This is far more than giving someone a character reference. It is important to know that, if the borrower defaults, the lender is entitled to come after the guarantor (you) for repayment before they go to the borrower.

The guarantee must be in writing and must be signed by you as guarantor. It should specify:

  • the amount of money for which you are liable
  • the circumstances in which you might have to pay, for example, if the debtor defaults, and
  • how long your obligation will last, for example, until the debtor repays the loan in full.

Try to limit your liability -

Many guarantees cover all of a borrower’s obligations to a lender (these are called “All Obligations” guarantees). This means that if you agree to guarantee someone’s car loan, you could be unwittingly be guaranteeing their other personal loans, and credit card debt as well. You can ask that the guarantee agreement limits the amount you guarantee (i.e. “limited guarantee”) e.g. to $50,000.

Another way to limit your liability might be to cancel the guarantee, which can generally be done at any time. While this does not release you from the original guaranteed loan amount it does mean that you won’t be responsible for any additional debt which the borrower incurs after you have cancelled.

Make sure you receive all the relevant documentation -
When you are guaranteeing a loan or other consumer credit contract, the lender must give you a copy of key information about the credit agreement so that you know what obligations as a borrower are. They must also give you a copy of the guarantee contract (a contract of guarantee must be in writing and must be signed, otherwise it cannot be enforced). For a credit contract, they have to do this before the guarantee contract is signed.

The creditor must inform you within five working days of any change to the credit contract which either increases the debtor’s obligations or shorten the payment period.

If the borrower misses payments and the creditor starts the repossession process, they must send you a copy of the repossession notices. If you do not receive the notices, your liability may be reduced.
Take care in choosing security for the loan or credit contract -
If you provide a 'secured guarantee' by listing items of property that can be claimed as repayment (i.e. security), these items will be taken from you if you cannot pay the loan. Avoid listing any items worth more than the debt.

Get a written agreement with the borrower -
As a guarantor, you have no direct control over the borrower's (debtor's) loan repayments. You can insist on a written agreement with them, which:
  • requires the debtor to keep you informed of their financial decisions 
  • allows you to see how much money is in the debtor's accounts 
  • states exactly who is responsible for which part of the loan

It’s best to seek legal advice before agreeing to be a guarantor.
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What obligations will the lender have to me as a guarantor?

For consumer credit contracts starting on or after 6 June 2015, the lender must comply with the Responsible Lending Principles. They must also comply with the Principles where the contract started before 6 June 2015, but the contract was varied (i.e. a change has been made to the contract) on or after that date.

Under these principle the lender must make reasonable enquiries before entering the loan, to ensure that you would be able to comply with the guarantee (if it becomes necessary) without it causing you undue hardship (i.e. you should still be able to meet your other financial commitments, buy food etc.).  

Unless your lawyer has done so already, the lender should inform you of the key features of the guarantee so that you can make an informed decision – especially if there is a greater risk to you (e.g. the borrower is more likely to default, or your home is the security for the loan). They should give you information in plain English so that it is clear, concise and intelligible.

For example you need to be told:

  • what your liabilities will be 
  • that you can ask that your liability be limited (the lender doesn’t have to agree to it if you ask)
  • whether you’ll be informed if the borrower has difficulties with repayments and when
  • key features of the credit agreement where they might affect your liability (e.g. whether the lender can change the interest rate)

The lender should generally recommend that you seek legal advice before you give your guarantee, and should generally require you to do so if your own home will be security for the loan.

If the lender has reason to believe that you might be under undue influence from someone else, they  should generally require you to seek legal advice from a lawyer who is not advising any of the other parties to the contract nor the person who is exerting undue influence.

The lender should ensure that you have a chance to ask them questions about the contract and your obligations without the borrower present.

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I agreed to be my son's guarantor but he couldn't afford to pay off the debt and has left the country! Is there anything I can do to avoid paying?

Unless you have made an additional legal agreement with either the creditor (to whom the debt is owed) or the person for whom you are a guarantor (the debtor), you cannot avoid paying. If the guarantee you agreed to includes special conditions for this kind of situation, then you may have other options.

Getting money from the debtor could be very difficult if they have left the country. Review your agreement to see what options you have and seek legal advice as soon as you are asked to pay.

If you think the credit contact is oppressive, then as a guarantor you are entitled to apply to the Court to have the contract changed.