The pros and cons of going guarantor
‘Going guarantor’ are two dangerous little words. “Nan, will you go guarantor on my car? You don’t have to pay any money.”
Stop right there. Going guarantor can be a great way to help others out. But it’s way more risky than most people think. Read this article before you say yes or no. The worst-case scenario is that the lender comes after you for the money. Parents have lost their homes from going guarantor and families have been torn apart. It happens.
Here’s what you need to know:
What’s a guarantor?
When Kiwis want credit to buy a car, or a house, or open a utilities account, sometimes they’re asked for a guarantor. That’s often mum or dad or a friend to guarantee payment if they default. Lenders ask for guarantors when the borrower’s credit score isn’t great, they don’t have a credit record, or too small a deposit. Parents or grandparents going guarantor on home loans is becoming increasingly common thanks to the high house prices and increasingly large loan to value ratios (LVRs) required to buy property.
A helping hand
It’s great to help out friends and whānau. Many Kiwis agree to go guarantor because they can or they like to help others. It’s only human.
It’s more than just a piece of paper
Many people don’t read the agreement they sign to go guarantor and even if they do, don’t understand the sting in the tail of the fine print.
You need to ask yourself if you can afford to pay the loan or bill if the other person can’t. What say they’ve not paid their electricity bill for a few months. Can you pay the arrears? By signing the guarantee you’ve told the lender that they can come after you if the other person does a runner from the payments. That could mean a debt collector on your doorstep taking away your car and other valuables, or in a worst case scenario putting your house up for mortgagee sale. “Ouch” is an understatement. What’s more, if you change your mind you can’t cancel the guarantee.
All their future debt
You’ll almost always find fine print that says you’re guaranteeing all of the other person’s current and future debt with that lender. That’s because there was an “unlimited deed of guarantee” clause in the fine print. It means that if your child or their partner takes out further loans with the same lender, you’re responsible for those as well. The Banking Ombudsman has heard cases where the guarantors didn’t know about new loans or they were responsible for debts even after a marriage broken up.
Wrecking your credit record
Another nasty problem rears its ugly head if the other person can’t pay and nor can you. It’s then that you’ll ruin your own credit record for a debt that wasn’t even yours.
If still want to go guarantor follow these rules:
- Have the mother of all discussions with the other person and their partner about the consequences
- Use a mortgage broker to negotiate with the lender to limit your guarantee to a fixed sum of money
- Arrange for your lawyer to review the guarantee document before signing and prepare an agreement for both you and the other person to sign
- Consider what happens if your child splits up from his or her partner. You don’t want to be left holding sexually transmitted debt
- In the case of a house purchase, ponder loaning the money for a deposit rather than going guarantor, but make sure a lawyer documents the transaction.
Sometimes going guarantor is the right thing to do. But many Kiwis have blotted their own financial future by going guarantor for a friend. Don’t let that be you.
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