Going guarantor? Be afraid, be very afraid
You’ve got your own home. Your children are grown up. You’re looking forward to a well-deserved retirement.
Your son or daughter wants to buy their own home/car/start their own business. The bank won’t lend them the money, so they come to you asking if you will go guarantor for them. It’s just a formality, they say.
The silly bank won’t lend them the money unless they have a guarantor. They really, really need the loan for this home/car/business.
Of course they can meet the repayments with their new job and their partner will also be paying. Please, pretty please, just sign. Don’t you love me?
What could possibly go wrong?
Well, for a start, you could lose your own home and find yourself penniless on the street. Unfortunately, it happens a lot. Those fantastic promises of your offspring to repay the loan themselves can fold suddenly if they lose their job, their partner splits or the new business goes belly up.
Never lose sight of what “going guarantor” means. You are agreeing in a legally binding document to the bank that you will pay off someone else’s debt if they can’t. Think for a moment: If a bank with all its checks and due diligence won’t lend someone money, why should you? Because that is what in effect you are doing. You will have to repay the debt if the borrower fails.
It is essential you get independent legal advice before you agree to go guarantor. There can be a lot of emotional pressure to sign, but all promises and assurances and “trust me” appeals don’t amount to a hill of beans when it’s your home on the line. It’s simple: If you aren’t prepared to pay the debt, don’t sign. This is a financial transaction, not a declaration of family love.
For those who do go guarantor, check everything. Are you guarantor for one fixed loan or “all monies”? Make sure the lender can’t change the amount without your consent. Check whether you are asked to provide a mortgage over your own house.
Is the borrower putting up their own security? Don’t agree to loans that are not scheduled to be repaid such as overdrafts or line of credit – they can go on indefinitely.
If the lender hasn’t given you a copy of the contract, an information statement on guarantees, or if you haven’t signed a guarantee document, or you were incapable of understanding it at the time, in certain circumstances the guarantee may be unenforceable.
Be extremely wary of going guarantor. The very thought should send a shiver of fear down your spine.
For more information please see Trouble at the bank of mum and dad – the horror story edition on family loans.