Has a family member or friend asked you to be a ‘co-borrower’ or guarantee a loan for them? Before you say yes, think carefully – you could lose not only your money, but valuable assets such as your house or car.
What is a guarantor or co-borrower?
If a credit provider thinks someone may not be able to repay a loan, they will ask for a guarantee. If you sign a guarantee for a friend or family member, you are known as the guarantor of the loan. You are a co-borrower if you sign a loan with someone else.
By signing your name as a co-borrower or guarantor, you are legally responsible for paying back the entire loan if the other person cannot or will not make the repayments. You will also have to pay any fees, charges and interest.
What will guaranteeing a loan give you?
Being a guarantor does not get you anything. You don’t have any rights to own the property or items bought with the loan. You won’t get a good credit record if the borrower pays off the loan. But you may end up with a bad credit record if you and the borrower can’t pay back the loan. The loan will be listed as a default or non-payment on your credit record, making it hard for you to borrow money for several years.
If you gave up the title deeds to your home to guarantee someone else’s loan, you may not be able to use your home as security for your own loan. You may even end up losing your home if you don’t pay out your friend or family member’s loan. You may also be made bankrupt by the credit provider. Even assets you haven’t offered as security for a guarantee may then be sold to pay the outstanding debt.
Before you guarantee a loan, ask the credit provider the following questions.
- What type of loan am I guaranteeing? – Be very careful about guaranteeing a loan that has no specific payback time, such as an overdraft. This type of loan could potentially go on forever.
- What should I check if I am asked to guarantee a business loan? – Find out everything you can about the business. Ask for a copy of the business plan to understand how it intends to operate. It’s also important to look at the financial state of the business. For example, check past financial statements and speak to the business’ accountant to make sure the company is in good financial health and has good prospects.
- Is the guarantee for a fixed amount of money, or is it for the total amount owing? – You are better off guaranteeing a fixed amount because you will know exactly what you owe. If you sign a guarantee for the total amount owing, you will be legally responsible for what the borrower owes now and in the future. This could include interest, fees, charges and penalties. If you think there has been an increase in the amount you agreed to guarantee without your consent, seek legal advice immediately.
- Exactly how much am I guaranteeing? – The guarantee should clearly describe how the amount of money you owe will be calculated if the worst happens and the borrower does not pay. If you are not comfortable with the amount, ask if you can reduce it.
- Do I have to put up assets as security? – If the loan is not for personal, household or domestic purposes, you may be asked to put up an asset such as your house as security. This means the credit provider can sell your house to pay the debt if the borrower defaults on their loan.
- What should the loan contract tell me? – Get a copy of the loan contract from the credit provider. It should tell you:
- The amount of the loan
- The interest rate, fees and charges
- Whether the loan is secured (where the borrower has to put up an asset, such as their house, as security)
- How long the borrower has to repay the loan
- The amount of the repayments
Never let a family member pressure or force you into signing anything. If a large amount of money is involved it is important that you speak to a professional in order to understand the potential risks. In certain situations, guarantors may be able to challenge a claim even though they have signed contracts. You should get advice immediately if you:
- Only agreed to sign through pressure or fear
- Suffered from a disability or mental illness at the time of signing
- Did not receive legal advice before signing and did not understand the documents or the extent of the risk you were taking on; for example, you thought you were guaranteeing a certain amount but a much larger amount is now being claimed
- Believe the credit provider or broker used unfair tactics, or tricked or misled you
Here at The Quinn Group our experienced team of lawyers and accountants can assist you with any queries you may have with regards to going guarantor for loans and understanding your rights and responsibilities. For more information submit an online enquiry or call us on 1300 QUINNS (784 667) or on +61 2 9223 9166 to book an appointment.