Going guarantor on a loan

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Going guarantor for family or friends can be risky.

If you guarantee a loan for a family member or friend, you’re known as the guarantor. You are responsible for paying back the entire loan if the borrower can’t.

If a lender doesn’t want to lend money to someone on their own, the lender can ask for a guarantee.

Before you agree to be a guarantor, think carefully about your own finances. Make sure you understand the loan contract and know the risks.

Know the risks of going guarantor

If you’re thinking about guaranteeing a loan, make sure you understand the risks. Take the same care as if you were taking out a loan for yourself.

You may have to pay back the entire debt

If the borrower can’t make the loan repayments, you will have to pay back the entire loan amount plus interest. If you can’t make the repayments, the lender could repossess your home or car if it was used as security for the loan.

It could stop you getting a loan

If you apply for a loan in the future, you’ll have to tell your lender if you’re guarantor on any other loans. They might decide not to lend to you, even if the loan that you guaranteed is being repaid.

You could get a bad credit report

If either you or the borrower can’t pay back the guaranteed loan, it’s listed as a default on your credit report. This makes it harder for you to borrow in the future.

It could damage your relationship

If you’re a guarantor for a friend or family member who can’t pay back the loan, it could affect your relationship.

If you don’t feel comfortable guaranteeing a loan, there may be other ways to help. For example, you might be able to contribute some money towards a house deposit.

Understand the loan contract

Before you sign a loan guarantee, get a copy of the loan contract from the lender ahead of time. Ask lots of questions so you understand the details.

Loan amount

Check whether you will be able to meet the loan repayments if the borrower can’t. Work out the total you would have to pay back, including the loan amount, interest, fees and charges.

If you guarantee the total loan amount, you will be responsible for the loan amount and all the interest. It’s better to guarantee a fixed amount so you know exactly how much you might have to pay.

Loan security

You may have to use an asset — like your house — as security. This means that if the borrower defaults on the loan, the lender might sell your house to pay the debt .

Loan term

A longer loan term may sound good but you will pay more in interest. Be careful about guaranteeing any loan that has no specified end date, like an overdraft account.

Business loans

If you’re asked to go guarantor on a business loan, you must understand the loan contract. You should also find out everything you can about the business.

  • Ask for a copy of the business plan to understand how it operates.
  • Speak to the accountant and look at financial reports. Make sure the business is financially healthy with good prospects.

How to get help

Being a guarantor might not work out as planned. In most cases, if the borrower can’t make their repayments, you won’t be able to get out of the loan contract.

Challenge a contract

You may be able to challenge a loan contract if:

  • you became a guarantor through pressure or fear
  • you had a disability or mental illness at the time of signing
  • you didn’t get legal advice before signing and didn’t understand the documents or the risks — for example, you thought you had guaranteed a smaller amount.
  • you think the lender or broker tricked or misled you

You can speak to a lawyer or get legal advice about your situation.

Wealthness Pty Ltd ABN 13 231 248 112  [t/a Better Financial Planning Australia]  is a Corporate Authorised Representative of Infocus Securities Australia Pty Ltd ABN 47 097 797 049 AFSL No. 236523. It is important to be aware that Better Financial Planning Australia is not authorised by Infocus to provide advice relating to credit services or property advice. Infocus is not responsible for any advice outside of the scope of this authorisation and should you wish to act on any of this general information, please first seek professional financial advice.

Wealthness Pty Ltd t/as Better Financial Planning Australia will endeavour to update the website as needed. However, information can change without notice and Wealthness Pty Ltd t/as Better Financial Planning Australia does not guarantee the accuracy of information on the website, including information provided by third parties, at any time.

This information is of a general nature only and neither represents nor is intended to be specific advice on any particular matter. Infocus Securities Australia Pty Ltd strongly suggests that no person should act specifically on the basis of the information contained herein but should seek appropriate professional advice based upon their own personal circumstances. Although we consider the sources for this material reliable, no warranty is given and no liability is accepted for any statement or opinion or for any error or omission.

Wealthness Pty Ltd t/as Better Financial Planning Australia does not give any warranty as to the accuracy, reliability or completeness of information which is contained in this website. Except insofar as any liability under statute cannot be excluded, Wealthness Pty Ltd t/as Better Financial Planning Australia and its employees do not accept any liability for any error or omission on this website or for any resulting loss or damage suffered by the recipient or any other person.

Wealthness Pty Ltd (ACN 613 313 250) [t/a Better Financial Planning Australia] Corporate Authorised Representative of Infocus Securities Australia Pty Ltd ABN 47 097 797 049 AFSL Licence No. 236523.

Source: ASIC MoneySmart

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