Guaranteeing a loan for someone else can be risky. Unless you clearly know what is involved and the financial responsibility you are taking on, you may suffer financial and personal hardship if the borrower does not meet his or her obligations.
What does this mean?
People on low incomes and many young people are often asked to provide a guarantor for a loan. The reason for this is that the credit provider has serious doubts about the person's ability to repay the loan, especially if they were to become sick, injured or unemployed.
When the guarantor signs the contract of guarantee, he or she agrees to meet all the terms and conditions of the borrower's loan if they stop paying.
More than just a formality
Guaranteeing a loan is more than 'just a formality'. A guarantee means that, if the person who borrowed the money is unable to repay the loan, the guarantor becomes legally liable to pay the balance owing. This could include not only the original amount borrowed, but also the interest and all charges.
If you are guaranteeing a loan for personal purposes, you can withdraw any time before the credit is approved.
If a guarantor is asked to pay more, or do anything not required of the person borrowing the money, an independent solicitor must explain the extra obligations to the guarantor.
If you are called on to honour a guarantee, see a solicitor straight away.
Don't take risks
Consider the following carefully before you act as guarantor:
- what is the total amount borrowed?
- how mature and responsible is the borrower?
- how stable is the employment of the borrower?
- does the borrower have any other mean of repaying the loan should she or he become sick, injured or unemployed?
- can you afford to repay the total amount of the loan if the borrower can not or will not?
Be careful
Even though it may be family or a friend, do not be pressured into going guarantor if you have any doubts.
Ensure you get a copy of the borrower's credit contract and financial statement. Read loan documents closely and understand their implications before signing the guarantee.
Never sign on the spur of the moment. Ask why your signature is necessary, so you can consider the risk objectively.
The credit company providing the loan that you have been asked to guarantee will want details of your financial position.
You may be required by the credit provider to provide security for the guarantee by way of a mortgage over your assets, eg. your family home.
If you are unsure of what you are signing, seek independent financial and legal advice.
Remember, if you go guarantor and the borrower defaults, then you will have to repay the loan.
Information and advice
After you enter into some formats of guarantee (involving consumer credit contracts) you have the right to ask the credit provider for details of the borrower's repayments at any time.
It is advisable to seek independent legal advice before signing any guarantee contracts. You can contact the Law Society (telephone: 08 8229 0222) for a list of solicitors in your area.
If you have any doubts about going guarantor, or any problems, contact a financial counselling service or community legal centre, or the Office of Consumer and Business Affairs.
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Information on copyright for the Office of Consumer and Business Affairs website is provided on behalf of South Australia Central http://www.sacentral.sa.gov.au/site/page.cfm?u=60
Disclaimer
Information on the disclaimer for the Office of Consumer and Business Affairs website is provided on behalf of South Australia Central http://www.sacentral.sa.gov.au/site/page.cfm?u=61
Privacy
The South Australian Office of Consumer and Business Affairs (OCBA) is committed to protecting your privacy and the confidentiality of your personal information, consistent with the South Australian Government's Information Privacy Principles. If you would like to view the full privacy statement please visit: http://www.ocba.sa.gov.au/privacy.html
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