Guarantors
If someone you know requires a loan, you might hear the term Guarantors a lot. If you plan on becoming a Guarantor, there are important details you need to know. Keep reading to learn what a Guarantor is, and the financial role they play.
What are Guarantors?
Sometimes a lender will only approve an applicant’s loan if somebody else agrees to be a ‘Guarantor’. Typically, a family member will assume the role (and the responsibility).
Basically, a Guarantor guarantees to pay off the loan if the applicant, for any reason, doesn’t pay the loan back. It is an enforceable legal document if taken correctly by the lender.
What does this mean?
What this really means is that you, as guarantor, are responsible for the whole loan if the applicant can’t (or won't) pay. The lender can then take action to recover their costs from you. This could include additional costs of the legal action, such as selling your home or other assets or pursuing your income to recover the money owing.
Should I be a Guarantor?
It’s natural to want to help your family or friends with their finances if you can afford to but consider the risk to your own financial position. Guarantors have lost their homes and life-savings because of somebody else's loan default.
Be aware thatnot all loans require a Guarantor:
- If the bank believes an applicant is a safe bet for a loan they would lend the money without needing a Guarantor.
- Banks want a Guarantor when they believe the applicant may have trouble making all the repayments.
- Consider whether you are happy to risk your money, because the bank does not want to risk theirs.
If you could not afford to pay back the loan yourself, you should not be a Guarantor.
You shouldnever let somebody pressure you into signing a bank or legal document. You should seek independent legal advice or financial counselling to understand the risks involved.
Can People Become Guarantors Without Knowing It?
It is possible for somebody to become a guarantor without knowing due to underhanded tactics.
If you find yourself tricked, misled or mistaken into becoming a guarantor, you should seek urgent legal advice.
You may have a valid legal defence against paying anything as guarantor, especially if you:
- signed due to deception, pressure or threats.
- had a mental illness or disability.
- did not understand the documents and had no legal advice.
What If I Want To Become a Guarantor?
Seek your own legal advice before signing any loan documents. Consider ways to:
- limit the guarantee to a maximum amount, that you can afford to pay back, if the lender will accept a guarantee for less than the debt, or a fixed overdraft amount
- limit the guarantee to only one specific loan (be aware you may be being asked to guarantee all debts to the lender by the person)
- monitor bank statements to ensure the loan is being repaid.
Can I Help Without Becoming a Guarantor?
There may be other ways you could help out the applicant, without the risk of being guarantor, such as gifting an affordable sum of money to reduce the size of the loan needed.
Another option to consider is the Victorian Homebuyer Fund shared equity scheme established in 2021 by the Victorian State Government. Basically, if you have 5% deposit saved, the government will provide 25% deposit (for an equivalent share in your home) which means you don’t have to pay mortgage insurance.
For further information and eligibility, see the State Revenue Office website.
Can Better Place Australia Help Me Better Understand Guarantors?
Better Place Australia free financial counselling and mediation services are available to people who have money troubles, including people looking to learn more about becoming a guarantor. If you live in one of the many government funded areas across Victoria, your first step is to enquire online or request an appointment.
For more real stories about people with financial troubles and how Better Place Australia financial counsellors mediated for them, go to the Financial First Aid home page and scroll down to Real Stories.
