Guarantors and co-borrowers
If someone asks you to be a guarantor or co-borrower for a loan, you need to think very carefully before saying yes. You could lose a lot if the other person cannot repay the loan and end up with a bad credit record yourself!
This information will help you to understand some of the risks with being a guarantor or co-borrower. Find out:
- what is a guarantor?
- what rights does a guarantor have?
- what obligations does a guarantor have?
- should you get legal and financial advice before becoming a guarantor?
- what happens if the person you are guarantor for doesn't pay the loan?
- what is a co-borrower?
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.
Under the contract, the guarantor promises to repay the loan (or part of the loan) if the borrower (debtor) is unable to pay.
What rights does the guarantor have?
The guarantor does not have any rights to own the property bought with the loan.
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're a guarantor for a friend or family member who can't pay back the loan, it could damage your relationship. If you are under pressure to be a guarantor it may be financial abuse.
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 happens if the borrower doesn't repay the loan?
If the borrower defaults on the loan, 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 borrower may not let you know they have stopped paying the loan.
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 the full amount if the other borrower can’t pay.
MoneySmart on being a guarantor of a loan
Reviewed: 5 September 2022