Guaranteeing a loan – good deed or perilous promise?

As guarantor, you guarantee a family member or friend will pay their loan, and if they can't, then you will. The fact a bank has asked for a guarantee suggests the borrower may not meet the bank’s criteria, or the bank is concerned the borrower may default on the loan. In short, you will likely be responsible for paying back the entire loan if the borrower can't. Acting as a guarantor comes with many obligations and is not a role that should not be taken lightly. It is likely the lenders bank will require a guarantor to obtain independent legal advice before proceeding.

Guarantors traditionally use their own property (or the equity in it) as security to guarantee either the entire loan or a portion of it. As guarantor, you will assume responsibility and make the repayments for the loan if the borrower can't make repayments, thereby lowering a borrower's risk in the eyes of a lender as they still get paid!

Some potential risks in acting as guarantor:

1. You may have to pay back the entire debt, plus interest if he borrower can't.
2. If the borrower or you fail to repay the loan, it can be listed as a default on your credit report.
3. Being guarantor could prevent you from getting your own loan, as you are required to tell and future lender about your role as guarantor. The lender may then decide not to lend to you.
4. Ultimately, if the borrower cannot make the repayments, it could jeopardise your relationship with them

Before agreeing the act as guarantor, you should understand the nature of the loan. In particular, you need to understand the entire loan amount (including the loan amount, interest, fees and charges), the length of the loan, the security of the loan (you may have to use your house or another asset as security) and any other details in the loan contract (i.e. is there an overdraft account).

If you are starting to think that acting as guarantor sounds risky, then you are right - it is risky. We’re not saying you shouldn't go guarantor on your loved one's loan, we're simply saying know the risks, get the right advice and understand exactly what you are signing up for. Our business lawyers, Siobhan Liston and Lachlan Edwards have experience in providing guarantor advice and are familiar with the pitfalls and catches tucked away in those long-winded guarantor documents.

Give us a call to ensure you get the right advice before going guarantor. Contact Siobhan Liston on 03 5445 1067 or Lachlan Edwards on 0427 916 442.