Be careful getting involved with a family member’s finances. Illustration by John Tiedemann
Be careful getting involved with a family member’s finances. Illustration by John Tiedemann

What to think about before going guarantor

IT"S the decision that can tear relationships and families apart.

Guaranteeing the loan of a loved one or friend which ends in trouble.

We are receiving a big spike in emails from readers who are losing their homes after going guarantor for a relative wanting to finance a small business … or an adult child buying a property.

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Just last week a retired couple in their 70s wanted to know what to do because their son's business had folded and the bank was in the process of foreclosing on their family home of 40 years to repay the outstanding debt.

Going guarantor sends a shiver down our spine at the best of times.

We have come across hundreds of examples where the very best of intentions in going guarantor has led to financial disaster and emotional heartache.

It's something that you don't wish on anyone because not only do people lose their house but, inevitably, it tears their family apart.

Taking responsibility for your own debts is one thing … taking responsibility for someone else's debts is just stupid.

We don't mean to be harsh but it just isn't worth the heartache.

Going guarantor for someone can be risky at the best of times.

Basically it is making a commitment to the bank that you will pay off someone else's debt if they can't.

This may be all right if you are certain the borrower is going to make good the loan, but if they are not, remember you could be left holding the entire debt.

Banks have a pretty strict process when it comes to lending money for a business.

You have to ask yourself that if a bank, with all their due diligence, won't lend a relative money then why should you?

But if you have to go guarantor make sure you take steps to limit your risk.

Make sure as the guarantor you seek independent advice.

Don't get emotional and be liable for a debt you can't afford.

Treat it as a financial transaction … if you can't pay the debt don't sign the paper.

Remember there are no friends in business and family should also be treated with caution.

Do not entrust the document to the borrower for signing.

You should be there with the borrower to watch all is in order.

As guarantor be there at the signing in case your signature miraculously appears on a document you have never seen.

Above all, understand what you are getting yourself into.

Even when you are sitting in the lender's office, do not sign your life away without reading the documents carefully.

Don't be afraid of taking time, even if the financer and friend is pressuring you to hurry up. A few minutes before you sign may save a few years of regret afterwards.

Going guarantor is not just a signature on a piece of paper.

It is you accepting the responsibility for a debt someone else can't pay.

The banks would have it that personal guarantees are rock solid and impenetrable.

In most instances they are. But there are three main grounds for appeal for people unexpectedly called upon to fulfil their obligations as a guarantor, but they are not easy.

Living at home while saving can be a better way to get started saving for a house deposit. Photo Steve Pohlner
Living at home while saving can be a better way to get started saving for a house deposit. Photo Steve Pohlner

• The first is misrepresentation, and can take two forms.

- Misrepresentation by the bank or lender. If it can be proved the lender has misled the guarantor in any way, then the contract begins to look shaky.

- If you can also prove a falsehood convinced you to enter into the contract, then there will probably be grounds for a cancellation of the contract.

• The second form of untruth is if the borrower misleads you as guarantor. This can also make the contract invalid.

The problem here is the borrower is probably skint anyway, so you will not have much joy recovering the debt.

Certain circumstances could make the lender responsible for the loan if it did not do its homework on the borrower properly.

• Another ground for challenge is if one party is deemed to have a special disability.

In simple terms this means there is an inequality between those involved in the transaction.

It could be a person is illiterate, mentally incapable or drunk and only applies if they are in an unfit state to make a decision.

So don't try talking your friend into going guarantor over a bottle of scotch or six, it may not stand up in court. Even if they can read the signature.

But this presumption can be thrown out if it can be proved the person would have entered the contract anyway.

Finally, there is a problem with the contract if one party has undue influence over the other.

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Some examples of this could be a parent over a child or, conversely and more likely, a child influencing elderly parents or grandparents.

Another common issue is when a spouse manipulates their partner into going joint guarantor on a loan of which they are not fully aware of the consequences.

You know, the old "just sign this, trust me it's okay".

This is a combination of Sexually Transmitted Debt and Financial Infidelity. Using their power in a relationship to blatantly mislead a partner into making a financial commitment which is to their financial detriment.

It is a singularly abhorrent act of betrayal and one which should destroy all trust in that partner.


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