Going guarantor or co-borrower
Responsibilities of a guarantor
A guarantor is a person who gives a guarantee. If you sign a contract to go guarantor for someone else's loan, you are saying that you will take on the financial and legal responsibility for paying off the loan if they don't.
Being a guarantor for someone else's loan, credit card or overdraft is a big responsibility. You're not simply giving them a reference or witnessing their signature - it's much more serious than that. You're actually taking on the legal responsibility for making sure the loan is paid back.
If you agree to go guarantor you will be asked to sign a 'contract of guarantee'. This is your written promise that the borrower will stick to the contract. By signing, you are taking on serious legal and financial responsibilities. If the borrower doesn't pay back the loan according to the terms of the contract, the lender can legally force you, as guarantor, to pay the money back instead.
Top of pageBefore you sign a contract
Don't rush into anything that you're unsure about. Before you sign the contract of guarantee, there are some things you can do to protect yourself. You should:
- read the contract thoroughly and note anything you don't understand
- find out about the borrower's financial position
- get independent legal or financial advice.
In Australia, a law called the Consumer Credit Code regulates finance provided for personal, domestic or household purposes. For more information go to Consumer Credit Code. Under this law, a contract of guarantee must contain a warning notice set in a box on the same page that you sign. It advises you to read the contract and the information statement that the lender must give you before you sign.
Important: Before you go guarantor for someone else's loan or line of credit, the lender must give you a copy of the credit contract. This will tell you how much is being borrowed and what extra charges there will be.
Changing your mind
It is possible to change your mind about going guarantor after you sign. However, this is possible only under the following circumstances.
- Before the borrower gets any of the money under the contract
- At any time, if something in the final credit contract that affects your liability, is different from the contract you received before you signed.
A withdrawal of guarantee must be done in writing.
Important questions you are entitled to ask the lender
Important questions include:
- What is the total amount of money needed to pay off the loan at a specific date?
- How much does the borrower currently owe?
- How much has already been paid?
- What amounts are overdue?
The lender must give you information within 14 days if the request relates to transactions made in the last year, otherwise it's 30 days. If you are asking the lender for the total amount needed to pay off the loan at a specific date, then they must give you this information within 7 days.
You can limit the amount of money you guarantee
After you have become a guarantor for a credit card or overdraft (or other continuing credit) you can put a limit on the amount of money you want to repay under the guarantee. This cannot be done for housing or personal loans. The limit that can be placed on a continuing line of credit can be either the amount that has already been given to the borrower or an amount that you specify.
Let's say you want to limit your guarantee on Joe's credit card to $2,000. If Joe spends $3,000 on his credit card but is later unable to pay the debt, you will only have to repay $2,000. To limit your guarantee you must notify the lender in writing.
When the lender asks for security
Sometimes a lender will ask you, as guarantor, to put up something valuable as security. This can be a house, car, land or something else of value. When this happens you will be asked to sign papers that set out the terms of the security, this is called the security agreement.
Property that is taken as security is known as secured property or security. The lender has certain rights over secured property and you can't sell it without their permission. If you don't fulfil your promise as guarantor they have the right to sell the secured property. If it is sold for less than the amount you promised to repay, you will still owe them money. The security agreement can be part of the guarantee or it can be a separate document. You should be given a copy of the security agreement within 14 days of signing it.
What happens if the borrower stops making repayments?
Generally, if the borrower stops making repayments the lender will contact both of you. Something must be done about it within 30 days of receiving the notice so it's important to speak with the borrower straight away. If the borrower doesn't pay back the money to the lender then legal action can be taken against the borrower and you, as guarantor.
The lender doesn't have to give any warnings of actions that they intend to take if:
- they believe that the borrower committed a fraud to get the credit
- the borrower cannot be found
- the Court has given permission
- they believe that the borrower will dispose of the secured property without the lender's permission.
The lender must first take action against the borrower and can usually only take action against you, as guarantor, if the borrower has failed to pay a 'judgement debt'. This is a decision by the Court that a borrower owes an amount of money and includes the loan amount, interest, Court fees and other costs.
If the borrower is bankrupt, can't be found or a Court has given the lender permission, legal action can be taken directly against you, as guarantor.
Important: If legal action is taken against you, as guarantor, you will have to pay what the borrower owes the lender. If you have limited your guarantee then you will have to pay to that limit.
Going co-borrower
It is not uncommon for a lender providing a loan to a person to try to get that person’s spouse or partner to be a co-borrower. If you open a loan account in joint names with your partner, it means you have become a co-borrower. Co-borrowers are both liable for the debt from the beginning. If the payments stop, the lender can choose who to sue for the whole debt. This may be decided on:
- Who has the highest income;
- Who can be found at the time.
There is no legal requirement that you and your spouse or partner must both sign a loan contract as co-borrowers.
Relationship debt
Special problems can arise in going guarantor or co-borrower because of your relationship with the borrower eg. if they are a family member, spouse or boyfriend. This is commonly referred to as 'relationship debt'. For more information refer to relationship debt web page.
Case study: going guarantor - read about Jean and how she got more than she bargained for...
Listen to information on Going guarantor (3:08 mins)