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Being a Guarantor for a Personal Loan

April 29th, 2014 -

What is a Guarantor?

A guarantor is someone who agrees to repay a loan if the borrower cannot pay.

A guarantee is a written contract between the lender and the guarantor. The guarantor signs a guarantee which is usually part of the borrower’s credit contract (agreement).

If you guarantee someone else’s debt you are agreeing to repay the debt if the borrower doesn’t. You are NOT witnessing a document to say that they are of good character, or to ‘do them a favour’.

Who can be a guarantor? 

Anyone over 18 can be a guarantor. Usually, a guarantor must have a steady income before they will be acceptable. The loan company (lender) must check that the guarantor can afford to pay the debt. The guarantor will have to pay even if they can’t afford to.

What is a ‘secured’ guarantee?

If you sign a secured guarantee you will be asked to list some of your property as security. This means that if the borrower doesn’t pay their debt, and you cannot pay either, then the lender can take the property you listed and sell it to repay the debt. Don’t list as security anything larger than the debt owing (e.g. your house). 

Try to limit your liabilityMany guarantees cover all of a borrower’s obligations to a lender (these are called “All Obligations” guarantees). This means that if you agree to guarantee someone’s car loan, you could be unwittingly guaranteeing their mortgage, other personal loans, and credit card debt as well. You can ask that the guarantee agreement limits the amount you guarantee (i.e. “limited guarantee”).

Make sure you receive the documentationWhen guaranteeing a loan, the lender must give you a copy of the credit agreement so that you know what their payment schedule is, and also a copy of the guarantee contract (a contract of guarantee must be in writing and must be signed, otherwise it cannot be enforced).  For a credit contract, they have to do this within fifteen days of the guarantee contract being signed. The creditor must inform you of any changes to the credit contract which either increase’s the debtor’s obligations or shortens the payment period, within five working days.

Any other notices sent to the borrower (debtor) must also be sent to you. If the borrower misses payments and the creditor starts the repossession process, they must send you a copy of the repossession notices.  If you do not receive the notices, your liability may be reduced. If you think the credit contact is unfair, then as a guarantor you are entitled to apply to the Court to have the contract changed.

Get a written agreement with the borrowerAs a guarantor, you have no direct control over the borrower’s (debtor’s) loan repayments. You can insist on a written agreement with them, which:

  • requires the debtor to keep you informed of their financial decisions
  • allows you to see how much money is in the debtor’s accounts
  • states exactly who is responsible for which part of the loan

It’s best to seek legal advice before agreeing to be a guarantor.

Further information can be viewed on http://www.consumeraffairs.govt.nz/for-consumers/credit-and-debt-1/guarantors/

 

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