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Mybudget
Dangers of going guarantor
By Tammy Barton

Debt stressed woman holding head

I was recently looking at the case of a MyBudget client, a couple aged 65 and 72 years old, respectively. At a time in their life when they should be looking forward to a happy retirement, they are instead faced with selling their home to pay off a $150,000 bank loan which they guaranteed for their daughter. Their daughter’s business went bust and the parents are now responsible to pay back the loan.

What is a guarantor? A guarantor is a person who promises to pay for another person’s debt should that person be unable or unwilling to do so. In most cases, a guarantor mortgages their home or other real estate to secure the loan. The arrangement is legally binding.

When is a guarantor required? When an applicant fails to meet lending criteria—due perhaps to unreliable income, poor credit history or lack of assets to secure the loan—the bank may ask the applicant to provide a guarantor.

When should you go guarantor for someone? Nine times out of ten, never. If the bank believes that the applicant represents too great a risk, they probably are.

Consider the risks as you would with any financial speculation: Why does the applicant need your help? What assets do they have of their own? What is their capacity to repay the debt? How will the loan money be used?

Contemplate the worst case scenario: What will happen if the borrower stops paying? Could you afford to pay the loan on your own? What would you risk losing? Your home? Your superannuation?

Before you sign anything, take a long look at the credit contract, especially the length of time the contract will run, the total amount that must be repaid and the terms of guarantee. It may well be worth the time and cost to get professional advice from a lawyer or accountant.

Most importantly, remember this… People rarely get into financial difficulty on purpose. Most financial hardship occurs because of unexpected life changes—things like job loss, business failure, divorce, illness, pregnancy. Changes like these can have devastating effects on a person’s finances, especially when debt is involved.

The couple in my example had great faith in their daughter and their daughter had every intention to repay the loan on her own, but life has gazumped them.

Sadly, the impact is not only financial, but emotional. The deepest cost of a loan guarantee gone wrong is often that of a damaged relationship.

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