Being a guarantor means you may have to repay someone else’s loan.
What going guarantor means
If a lender won’t lend to someone on their own, they may ask for a guarantor. A guarantor agrees to repay the loan if the borrower can’t. You may have to repay all of it.
Before you agree, check you can afford the risk. Read the loan contract and ask questions.
If you feel pressured or unsure, talk to a financial counsellor. It's free and confidential.
A financial counsellor can also help you think through the risks for your situation. You can speak to a lawyer or get free legal advice too, before you sign, so you understand the contract.
Understand the risks of going guarantor
If you're thinking about going guarantor on a loan, understand the risks first. Treat it like you’re taking out the loan for yourself.
report You may have to pay back the entire debt - If the borrower can't make repayments, you may have to repay the whole loan plus interest. If you can't pay, the lender may repossess an asset you used as security, such as your home or car.
report It could stop you getting a loan - If you apply for a loan later, tell the lender about any loans you guarantee. They may decide not to lend to you, even if the borrower keeps up repayments.
report You could get a bad credit report - If you or the borrower can't repay the guaranteed loan, the lender may record a default on your credit report. This can make it harder for you to borrow in the future.
report It could damage your relationship - If you go guarantor for a friend or family member and they can't repay the loan, it can strain your relationship.
If you don't feel comfortable going guarantor, you can help in other ways. For example, you might contribute money towards a house deposit.
If someone pressures you to go guarantor on a loan, this may be a sign of financial abuse. You can get support.
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Sign upHow to read the loan contract
Before you sign a loan guarantee, ask the lender for the loan contract early. And keep asking questions until you understand the details.
Loan amount
Check if you could afford the repayments if the borrower can't. Add up what you might owe, including the loan amount, interest, fees and charges.
If you guarantee the total loan amount, you will have to repay the total loan amount and all the interest.
Sometimes you can guarantee only part of a loan. For example, you might guarantee a set amount to cover part of the deposit. This may limit what you owe, but you could still lose an asset you use as security.
Ask the lender to confirm the exact amount, when it may reduce, and when it can end.
Loan security
You may need to use your home as security. If the borrower defaults and you can’t pay, the lender may sell your home to recover the debt.
Loan term
A longer loan term can lower the repayments, but you usually pay more interest overall. Be careful about guaranteeing a loan with no clear end date, such as an overdraft account.
Business loans
If you're asked to go guarantor on a business loan, read the loan contract with extra care. Business income can change fast, so the risk can be higher. Also, responsible lending obligations do not apply to business loans.
You should also find out everything you can about the business.
- Ask for the business plan and cashflow forecasts.
- Ask for recent financial statements (profit and loss, balance sheet).
- Request a copy of the borrower’s credit report and any related credit reporting for the business.
- Ask for what security you must provide and what the guarantee covers.
- You should get independent accounting and legal advice before you sign.
Mary guarantees a business loan for her son
Mary’s son Leo has worked in hospitality for years. He saw a popular local food franchise for sale and wanted to run his own business.
The franchise director told Leo that the brand was strong, profits were high and costs were low. Leo thought it was low risk.
He applied for a $250,000 business loan with his bank. Mary agreed to go guarantor and used the family home as security.
The business earned less than Leo expected and his costs went up. After paying rent and franchise royalties, he struggled to make the loan repayments.
Leo and Mary spoke to the bank about repayment options. If Leo still can’t repay the loan and Mary can’t cover it, the bank may sell the family home to recover the debt.
How to get help
Being a guarantor might not work out as planned. If the borrower can't make repayments, it can be hard to get out of the guarantee.
Challenge a contract
You may be able to challenge a loan contract if:
- you agreed to be a guarantor because of pressure, threats or fear
- you had a disability or mental illness when you signed
- you didn't get legal advice and didn't understand the documents or the risks (for example, you thought you had guaranteed a smaller amount)
- you think the lender or broker tricked or misled you.
Before you decide to guarantee a loan, you can speak to a lawyer or get free legal advice about your situation. You can also get free legal advice if you want to challenge the guarantee.