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Guarantors and co-borrowers

Guarantors and co-borrowers

What is a guarantor?

If a lender thinks a borrower may not be able to repay a loan they will ask for a guarantee.  A guarantor is someone who signs a contract, called a guarantee with a lender (sometimes called a credit provider). They are known as the guarantor of the loan. 

Generally the guarantee covers the whole loan but it can be limited to only part of the loan. The guarantee could be for a fixed amount, or "all monies", that is, the total amount owing now and in the future, eg for a loan with a line of credit the amount guaranteed could be increasing. It could have a specific payback time, or have no specific time, eg an overdraft, and go on forever.

Under the contract, the guarantor promises to repay the loan (or part of the loan) if the borrower is unable to pay. 

Case study

 

Linda's daughter Mary wanted to buy a house. The bank told her she did not earn enough to get the loan by herself. Mary asked Linda to guarantee the loan. Although Linda had doubts about Mary's ability to stay at her current job she said yes. Linda's main asset was her own house which she still had a mortgage for.

A year later Mary lost her job and due to illness was unable to find another one. Mary could not keep up the repayments even after negotiating a variation. Property prices have dropped and Mary's house is worth much less than she paid for it. More money is still owing than the house is now worth. Linda had put her own house up as security for the guarantee and does not have any other assets. She has received letters from the bank seeking repayment of the outstanding debt. Linda might have to sell her home to pay off Mary's debt.

 

Should I get financial and/or legal advice before becoming a guarantor?

You should get both independent legal and financial advice before signing a guarantee.

If you have already signed a guarantee, you should get legal and financial advice if you did not get it before signing so that you fully understand the consequences of being a guarantor and your future options.

What are the obligations of a guarantor?

The guarantor is responsible for the amount of the loan they have guaranteed if the person they are guarantor for can't make their repayments (sometimes called "defaulting") on their loan.

What do I get out of being a guarantor?

You do not get anything. But you could:

  • end up with a bad credit rating if you and the borrower can't pay back the loan
  • end up losing your home if you used your home as security for the loan and you can't pay back the loan if the borrower defaults, or
  • be made bankrupt by the credit provider and then assets you haven't offered as security for a guarantee may be sold to pay the debt.

So think carefully before you agree to be a guarantor as you could lose a lot. There may be another way to help without becoming a guarantor.

You should get both independent legal and financial advice before signing a guarantee.

How do I know how much I am guarantor for?

The guarantee should clearly describe how the amount of money you owe will be calculated if the worst happens and the borrower does not pay. You should make sure you have the details of how much the borrower is borrowing and any other charges.

You should be given a copy of the contract of guarantee by the lender. You should also be given a copy of the credit contract or offer signed by the borrower. If you haven't been given these documents you should ask for them from the lender.

There are special rules for some types of consumer credit contracts that cover when you should receive these documents.

Can I withdraw my guarantee?

In some circumstances a guarantor can withdraw their guarantee before the loan has been provided. 

Get legal advice if you want to withdraw or cancel your contract of guarantee to see what the law is in your situation.

What if I want to change the amount I am guarantor for?

If you want to change the amount you are guarantor for you should seek legal advice as soon as possible.

What happens if the person I am guarantor for doesn't pay the loan?

As indicated above, the guarantor is responsible for the amount of the loan in the guarantee.

The lender can take possession of, or sell, any of the assets of the guarantor that have been listed as security to repay the debt, for example, their house.

Be aware that the person you are guarantor for may not let you know they have stopped paying the loan.

What if I was pressured into being a guarantor or didn't understand what I was committing to?

Get legal advice as soon as possible.

What is a co-borrower?

A co-borrower is a borrower. A co-borrower signs a loan with someone else who is also a borrower.

The co-borrower is legally responsible for repaying the whole debt if the other borrower cannot make the repayments.

Before agreeing to be a co-borrower you should think about what you will get out of the arrangement given you will be responsible for repaying the loan and could lose a lot.

You should get independent financial and legal advice before becoming a co-borrower so you are clear on your obligations

Where can I get more information?

  • See Credit reporting for information about the file held by a credit reporting agency about your credit history.

  • Contact the Financial Counsellors Association of WA Financial Counselling Hotline on 1800 007 007 for independent financial advice before you become a guarantor or co-borrower, or if you are already one and have concerns about its possible impact on you financially.

  • Contact Legal Aid WA's Infoline on 1300 650 579 for information and referral.
  • On the MoneySmart (ASIC) website you can download a factsheet: Love and loans which has information on being a guarantor or co-borrower, things to think about before becoming a guarantor, other tips, and questions to ask the credit provider before you guarantee the loan.

  • The Credit Regulations 1985 (WA) under Schedule 1 Form 11 outlines the Things you should know about guarantees which is the information the law says a credit provider must give you about the contract of guarantee. It includes information on what happens if the borrower defaults.

  • Contact the Department of Mines, Industry Regulation and Safety (WA)- Consumer Protection section on 1300 30 40 54 for more information on being a guarantor and the help it can provide in dealing with credit providers in certain circumstances, eg if you are being harassed, or cannot make repayments because of illness.

 

Last reviewed: 29/01/2015

 

Last modified: 10/08/2017 2:52 PM

Disclaimer

The information displayed on this page is provided for information purposes only and does not constitute legal advice. If you have a legal problem, you should see a lawyer. Legal Aid Western Australia aims to provide information that is accurate, however does not accept responsibility for any errors or omissions in the information provided on this page or incorporated into it by reference.