Before you guarantee a loan, ask the credit provider the following questions.

Q. What type of loan am I guaranteeing?

Be very careful about guaranteeing a loan that has no specific payback time, such as an overdraft. This kind of loan could potentially go on forever.

Q. What should I check if I am asked to guarantee a business loan?

Find out everything you can about the business or borrower. Ask for a copy of the business plan to understand how it intends to operate. It’s also important to look at the business’ or individual’s financial state. For example, check past financial statements and speak to the business’ accountant to make sure the company is in good financial health and has good prospects.

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Q. Is the guarantee for a fixed amount of money, or is it for the total amount owing?

You are better off guaranteeing a fixed amount because you will know exactly what you owe. If you sign a guarantee for the total amount owing, you will be legally responsible for what the borrower owes now and in the future. This could include interest, fees, charges and penalties. If you think there has been an increase in the amount you agreed to guarantee without your consent, seek legal advice straight away.

Q. Exactly how much am I guaranteeing?

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. If you are not comfortable with the amount, ask if you can reduce it.

Q. Do I have to put up assets as security?

If the loan is not for personal, household or domestic purposes, you may be asked to put up an asset such as your house as security. This means the credit provider can sell your house to pay the debt if the borrower defaults on their loan.

READ: Key things you must never ignore as a loan guarantor

Q. What should the loan contract tell me?

Get a copy of the loan contract from the credit provider. It should tell you:

    • The amount of the loan
    • The interest rate, fees and charges
    • Whether the loan is secured (where the borrower has to put up an asset, such as their house, as security)
    • How long the borrower has to repay the loan
    • The amount of the repayments

Never let a family member pressure or force you into signing anything. If a large amount of money is involved, talk with a lawyer or get legal advice so you understand the risks you are taking on.

Challenging a claim
In certain situations, guarantors may be able to challenge a claim even though they have signed contracts. You should get advice immediately if you:

  • Only agreed to sign through pressure or fear
  • S******d from a disability or mental illness at the time of signing
  • Did not receive legal advice before signing and did not understand the documents or the extent of the risk you were taking on; for example, you thought you were guaranteeing a certain amount but a much larger amount is now being claimed
  • Believe the credit provider or broker used unfair tactics, or tricked or misled you
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