What is a Guarantor?
Sometimes a lender will only approve an applicant’s loan if somebody else (usually a family member) agrees to be a ‘Guarantor’ which ensures the loan can be repaid by another source if needed.
What Does this mean?
Basically, a Guarantor makes a promise, or 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 this really means is that you, as guarantor, will be held responsible for the whole loan if the applicant can’t pay or, in the worst case scenario, just doesn’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 that not 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 should never 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.
BUT I DIDN’T KNOW I WAS A GUARANTOR!
If you have somehow been 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:
- were tricked, pressured or threatened into signing
- had a mental illness or disability
- did not understand the documents and had no legal advice.
If you still decide to be 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.
How else could you help?
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.