Loans involving family and friends
For love or money
Has a family member or friend ever asked you to be a ‘co-borrower’ or guarantee a loan for them? Before you agree to be a guarantor or co-borrower on a loan, think carefully – you could lose a lot.
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Know what you’re getting into
If a credit providerthinks a borrower may not be able to repay a loan, they will ask for a guarantee.
If you sign a guarantee for a friend or family member, you are promising to pay the entire loan back if they cannot or will not do so, along with any fees, charges and interest.
And if your guarantee is secured against an asset like your home, you may end up losing it or other your assets if you don’t have the money to pay out the loan you’ve guaranteed. You may also be made bankrupt by the credit provider, which means that even assets that have not been offered as security for the guarantee may be sold to pay the outstanding debt.
Being a guarantor does not give you anything. You do not have any rights to own the property bought with the loan, nor will it give you a good credit record if the borrower pays off the loan. You may however, end up with a bad credit record if the borrower doesn’t pay and you cannot.
Being a guarantor may interfere with your ability to get a loan, as the guarantee is recorded as a debt outstanding to you. You may have also had to surrender the title deeds to your home, which will mean you may not be able to use your home as security for a loan of your own if you need one.
Connie (63) agreed to guarantee a business loan for her son
Our family ran cafes for years until my late husband became too ill to work. My son Leo grew up working for the family business. I thought he could make a go of it. But I didn’t know that he had a gambling problem.
A few months after I signed the business loan for him, Leo got behind in repayments. Then he got evicted from the cafe for not paying rent. The bank and the landlord contacted me to pay back what was owed. I’m afraid I’ll have to sell my house to pay it all off.
 Your stories about credit |
Think carefully before guaranteeing a loan
Think very carefully before giving a guarantee if you are at risk of losing your only home if the borrower does not pay. Do you need to give a guarantee? Is there some other way you could help without going guarantor? For example, you might be able to contribute to a deposit so that it is bigger and a guarantee is not required.
Find out how the borrower intends to repay the loan. Do they have a regular income, for example?
You must be able to pay back the loan if the borrower cannot. This could mean selling assets, such as a house or car.
Do you have a plan on how to pay the debt if the borrower does not pay? Some options to consider:
- Do you have assets you don’t need that you can sell to pay the debt?
- Do you have savings to cover the debt?
- Can you afford to make repayments on the loan if the borrower stops making the repayments?
If you are being asked to guarantee a business loan, make sure you find out everything you can about the business. For example, check past financial statements and speak to the business’s accountant for an outsider’s opinion.
If you still want to go ahead with the guarantee, ask if you can reduce the amount you are guaranteeing. It is worth trying to negotiate a lower amount.
Think about the possible effect the guarantee may have on your relationship with the borrower if something goes wrong. It may be better to say no now, rather than having a more damaging disagreement later if things go wrong.
Get independent legal advice
Never allow a family member to pressure or force you into signing anything that you don't want to sign. If a large amount of money is involved, talk with a lawyer or get free legal advice to make sure you understand the risks you are taking on.
If you’re feeling pressured, see a free financial counsellor
or go to your local community legal centre for help.
In certain limited situations, a guarantor may be able to challenge a claim for payment of a guarantee even where a contract was signed. You should get legal advice immediately if, at the time you signed a guarantee, you:
- suffered from a disability or mental illness
- only agreed to sign through pressure or fear
- did not understand the nature of the documents, or the extent of the risk you were taking on, and did not receive legal advice before signing (for example, you may have thought you were giving a guarantee limited to a certain amount of money but a much larger amount is now being claimed, or you believe that the credit provider or broker used unfair tactics, or tricked or misled you when arranging the finance).
Checklist: what to ask before you guarantee a loan
Before you agree to guarantee a loan, check each of these things with the credit provider:
- What type of guarantee are you providing?
Is the guarantee for a fixed amount of money, or is it for ‘all monies’? You are better off guaranteeing a fixed amount because you will know exactly what you owe. If you sign an ‘all monies’ guarantee, you may be legally responsible to pay all amounts the borrower owes now and in the future. This could include interest, fees, charges and penalties. If you believe that there has been an increase in the amount you have agreed to guarantee, without your consent, seek legal advice without delay.
- What is the exact amount you are guaranteeing?
The guarantee should clearly state the exact amount of money you will owe if the worst happens and the borrower does not pay.
- Could you lose assets?
You may be asked to provide a mortgage over your house as a guarantee. This means you may have to sell your house to pay the loan if the borrower does not pay.
- Do you have a copy of the loan contract?
The loan contract should tell you the amount of the loan and the interest rate on it, and whether the loan is 'secured' (which means that the borrower is providing an asset, such as their house, as security). It should also state the 'term' of the loan – that is, how long the borrower has to repay the loan – and the amount of the loan repayments.
- What type of loan are you guaranteeing?
Be very careful about guaranteeing a loan that has no specific period of time in which it needs to be repaid, such as an overdraft or a line of credit. This kind of loan could theoretically go on forever.
How does being a co-borrower work?
As a co-borrower, you will be legally responsible for the whole debt if the other person does not make repayments on the loan, not just your share. If neither of you can pay the debt, you will probably end up with a default listing on your credit report, making it hard to borrow money for several years, and you risk being made bankrupt.
Do not sign a loan as a co-borrower unless you are also getting a share of the benefit (such as sharing ownership of a house or car).
What happens if a relationship breaks down?
A breakdown in your relationships can affect every part of your life, including your finances. You might find yourself supporting your children with little or no help from your ex-partner, or stuck with joint debts that they’re unwilling or unable to help you pay.
If you signed a loan contract as a co-borrower or guarantor (or you were a director of a family company or partner in a business), you might be liable for your ex-partner’s debts.
In most cases, you won’t be able to get out of loan contracts you made in the past, but you should get legal advice about where you stand.
Find free legal advice.
When a relationship breaks down
If you are affected by a relationship breakdown, consider the following:
- If possible, discuss with your ex-partner who will take responsibility for paying each debt. Make sure you receive copies of account statements (or check the accounts online or by phone) to check that debts are being paid as agreed.
- Make sure all jointly accessed savings accounts are changed to 'two to sign'.
- Make sure all redraw facilities and loan offset accounts are frozen and cannot be accessed without your consent and signature.
- If your credit card has an additional cardholder, cancel the additional card.
- Cancel any utility accounts (for gas, phone and electricity) in your name that you no longer need. Your ex-partner can then get them reconnected in his or her own name.
When to get legal advice
Always get legal advice if:
- Your ex-partner won't continue to repay joint debts (or their share). In this case you may need to contact your credit provider to seek a hardship variation (see trouble with debt).
- You think you might not owe a debt.
- You need to negotiate a property settlement (which may include debt).
Even if your relationships are okay, a problem like gambling addiction can affect everyone in the family, especially if you have to sell something (a car or even your home) to pay off the debts.
For gambling problems, contact one of the free helplines listed below:
For information about family relationship support services, go to the Family Relationship Services Australia website at www.frsa.org.au.
Stop and think before agreeing to be a co-borrower or to guarantee someone else's loan. Remember, if the borrower (or co-borrower) cannot or will not pay off the loan, you will be responsible for paying it all back. So take the same care that you would if you were taking a loan out for yourself.
More information
FIDO Website: Printed 09/10/2010
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