What is a guarantee?

A guarantee is where you promise to repay the loan if the borrower does not pay. The lender will ask for a guarantee when it thinks the borrower may have difficulty repaying the loan.

Providing a guarantee is a big responsibility! If the borrower does not make all the repayments under the loan contract you will have to pay back the entire amount outstanding plus interest, charges and fees.

REMEMBER: YOU DO NOT GET ANYTHING OUT OF GIVING A GUARANTEE! YOU DO NOT GET:

• ANY RIGHTS TO ANY OF THE GOODS OR PROPERTY THE BORROWER IS PURCHASING WITH THE LOAN
• A POSITIVE CREDIT RECORD
• IT WILL NOT MAKE IT EASIER FOR YOU TO GET A LOAN FOR YOURSELF
• IT WILL NOT NECESSARILY MAKE IT EASIER FOR THE BORROWER TO GET A LOAN IN THE FUTURE

What questions should you ask yourself before going guarantor?

How does the borrower intend to repay? For example, does the borrower have a regular source of income to repay the loan?

If you are guaranteeing a business loan, what do you know about the business? Get information on the financial state of the business. For example, ask for financial statements on the business' past performance, speak to the business' accountant, and get an independent opinion on the business.

How can I repay the whole amount owed if the borrower does not pay? Would you be able to pay the loan if something went wrong? How would you do this, would you need to sell assets, could you manage the repayments along with your other expenses and repayments?

Do I really want to do this? Many people feel pressured into signing a guarantee for a range of reasons. In some cases people sign guarantees to preserve a relationship with a family member. In other cases a dependant spouses feels s/he has no choice because the family is dependant on the income generated by the business needing the loan. Whatever the reason - get independent financial and legal advice, particularly if the loan is for a substantial amount. It also pays to remember that while many guarantees are never called upon, things can and do go wrong. In such cases, relationships (between spouses, parents and children and even grandparents and grandchildren) can be permanently damaged.

Have I considered other options for achieving the same objective? If your child asks you to guarantee a car loan for example, consider some alternatives. Perhaps you could give them an interest free loan of a few thousand dollars as a deposit, or offer to match their savings if they wait a few months, or just talk them into a cheaper car. If the loan is for a family business, talk to your accountant. Is there another way of obtaining the required funds? If a guarantee is absolutely necessary, is there some way of minimising the amount of the guarantee and/or the risk that it will be called upon?

So what questions should I ask the lender and what should I check?

• What type of guarantee am I giving? Is the guarantee for a fixed amount of money or "all monies"? "All monies" guarantees are for all amounts owing now and in the future. It is recommended that you do not agree to sign all monies guarantees due to the uncertainty as to how much you may have to pay if the borrower does not pay.
• If the guarantee is for a fixed amount what is that amount? Make sure the guarantee clearly states this.
• Confirm that the lender cannot change the amount being guaranteed without your consent.
• Check whether you are asked being asked to provide a mortgage over, for example, your house.
• Check that you are listed as a guarantor on the loan contract.
• Ask for a copy of the loan contract, which should cover the following details:
  a. The amount of the loan
  b. The interest rate on the loan
  c. Is the loan secured? Is the borrower putting up security for the loan(for example their home)?
  d. The term of the loan. This will give you a guide as to what period of time you have to worry about the repayment of the loan.
  e. The amount of the loan repayments
  f. The type of loan. Take care with guaranteeing loans that are not scheduled to be repaid, for example overdrafts and line of credit loans. Guarantees of these types of loans can theoretically go on indefinitely!

If you are guaranteeing a loan for personal purposes, for example, a home loan or personal loan the lender must:

• Give you an information statement on guarantees
• Give you a copy of the loan contract
• Give you a copy of the guarantee
• The guarantee must be in writing and signed by you
• If the lender fails to comply with any of the above requirements (#1 to #4) the guarantee is "unenforceable". Get legal advice.
• You can withdraw from the guarantee up until the loan is provided to the borrower(s)
• If the lender and borrower wish to increase or change the loan they need your consent to extend your guarantee