One day, a family member, loved one or friend may ask you to guarantee a loan for them.
It can be an awkward situation, and feeling obliged to say yes can mean you lose your assets as a result if it goes wrong.
There is an enormous amount of responsibility on a guarantor – if the co-borrower can’t or won’t make repayments, the guarantor is legally responsible for paying back the entire amount of the loan, plus any fees, charges and interest.
Guaranteeing a loan for someone really is for people that live to give, because there is nothing they get in return for it. As guarantor you have no legal right to own the property but if the borrower can’t pay back the loan you get stuck with a bad credit rating.
If you gave up the title deeds to your own home and you don’t pay out the loan when the co-borrower defaults, you may well lose your home. And you certainly won’t be able to use your home as security if you wanted to take out any loans yourself down the track.
The lending bank can even make you bankrupt and take assets that you didn’t put up as security to help pay it out.
It is a big move, and you need to think very carefully before saying ‘yes’ to even your closest loved ones.
Sometimes it can pay to think about other ways you can help the person coming to you hoping you’ll guarantee a loan for them. For example, offering to contribute towards a deposit so there is no need for a guarantor at all.
It is crucial to ask yourself the following questions before you agree to be a guarantor for someone’s home loan:
- How will I pay back the loan if the co-borrower can’t?
- Can I afford to make the repayments if this happens?
- Do I have enough savings or assets I can sell to pay the debt? Having to use these to pay back the debt puts your financial future at risk.
- What will happen to the relationship with the co-borrower if they default on the loan? Will it cause conflict and/or a split in the relationship, which is no doubt held close to heart and highly valued. It may be better to just say ‘no’ first-up to avoid this possibly relationship-damaging scenario.
If you are happy with these, you need to ask at least some of the following questions about the loan itself:
- What type of loan am I guaranteeing?
- If it’s a business loan you are guaranteeing, it’s wise to ask about the business plan to see how the business will operate and to find out the business’ financial state by checking previous statements and talking to their accountant.
- Is the guarantee for a fixed amount or for the total amount of the loan? If it’s a fixed amount you’ll always know where you are at, but if it’s for the whole loan you’ll be responsible for what the co-borrower owes now and in the future, including fees, charges and penalties.
- What is the exact amount I am guaranteeing?
- Do I have to put up assets to secure the loan?
- Does the loan contract tell me the amount of the loan, the fees, charges and interest rates, whether the loan is secured, how long the borrower has to pay back the loan and how much the repayments are? It needs to tell you all of these things.
In light of this, it is clear that it is important not to feel pressured or forced into signing on as guarantor for someone’s home loan. If you are it’s a great idea to seek financial counselling.
At the end of the day, you should take being someone’s guarantor as seriously as you would taking out your own home loan, because ultimately you are equally responsible.