At some stage in your life you may be approached to go Guarantor either for one of your children or for a relative or friend.
I tell my client’s that there are three groups of people for whom you should never go Guarantor..
- Friends; and
I repeat NEVER go Guarantor for family, friends or strangers.
If you rule out those three groups you will be safe (because there are not too many others left).
The reason I advise this is that unfortunately we see case after case where client’s, who did not wish to offend, or did not understand what they were really getting into, find themselves in a plethora of trouble.
I appreciate that sometimes it is hard to say “no” to a child or a sibling or best friend who comes to you with a request to go Guarantor because at the time there doesn’t seem to be too much harm done by simply signing a piece of paper. But it is what happens down the track when things go wrong which can have devastating effects.
If you think about it for a second the reason why a bank wants somebody else to guarantee the loan is because they, after careful consideration and analysis of the borrower’s financial position, ability to repay etc have not go the confidence to lend the money to that person without someone else guaranteeing repayment of the loan. If the banks, with all their billions of dollars, aren’t prepared to take the risk, why should you?
Another factor that a lot of people don’t understand is that if you go Guarantor for say a $300,000.00 loan then as far as your bank is concerned that is a debt on your balance sheet. Therefore, if you then later decide that you wish to borrow money, the amount of your guarantee will be taken into consideration along with your other existing debts in determining how much you can borrow.
I appreciate that sometimes parents want to give their child “a helping hand” in buying their first property and will agree to go Guarantor. If you must, then there are some steps you can take to try and protect yourself.
- Always go for the MINIMUM amount the bank will accept. The bank may only need you to go guarantor for $80,000.00 on a $350,000.00 loan. In which case you must make sure that is all you guarantee.
- Always ensure that the Guarantee is LIMITED to a maximum amount. That way, in a worst case scenario where your guarantee is called upon you know exactly how much you are up for.
- Make sure that you only guarantee the SPECIFIC loan for which you have been asked to Guarantee. The fine print of some guarantees actually provides that the Guarantor is responsible for ALL loans of the Borrower both existing and future.
- Request that you be provided with bank statements of the loan so that you can ensure that it is being kept up to date and has not fallen into arrears.
- Terminate the Guarantee as soon as you can, don’t let it continue in perpetuity.
I can recount dozen’s of cases where I have seen parents who have had to sell their home or lose their nest egg because they had gone Guarantor for a child in a failed business venture. Invariably, the first notice that the Guarantor has of there being a problem is when they are notified by the bank. Most borrower’s are too embarrassed (or thoughtless) to approach the Guarantor to let them know that there may be a problem.
So remember my advice DON’T go Guarantor for family, friends or strangers.