It is natural for family and close friends to want to help each other when they need it. For guarantors – they are often near to retirement, with perhaps only a small mortgage on their home. They have no other debts and a good credit rating.
This gives them the ability to help out often their children or other family members who seem to be struggling to get ahead – possibly unable to buy a home, purchase a car or enter into the business they have been hoping to secure.
It seems so easy just to sign off on that loan for their family, and see them get ahead in life right? Well this is not always the case.
In the past there have been clients who have gone guarantor for someone, only to find at some point they have not made repayments on the loan, leaving the guarantor responsible for the debt. Sometimes the guarantor is unaware the repayments are not being made. It is when they are refused credit themselves that they realise payments are late and their credit file has been tarnished.
– What is a guarantee?
When people seek approval for a loan, a lender can sometimes require a potential borrower to provide a guarantee if they feel there may be some doubt as to whether the loan will be repaid. This sometimes occurs when the potential borrower has no credit history, or a bad credit rating, or perhaps an inadequate savings record.
Often it is a family member, and generally a parent who is asked to guarantee the loan. The guarantor agrees to be responsible for repayments on the loan should the borrower fail to make them and this is including all interest, charges and fees that are due to the lender.
– What can go wrong?
Well a lot actually. Number one being the borrower fails to keep up with their repayments.
Repayments which are more than 60 days late are listed as defaults on people’s credit files. The default would be listed on both the borrower’s and the guarantor’s credit file. Once somebody has a bad credit rating, it can be very difficult to obtain further credit. Most of the major banks will reject loan applications when people have defaults on their credit file. It can be difficult to even obtain a mobile phone plan.
Worst case scenario if repayments are not made, is the bank begins to use the property the guarantor used as collateral, to recover lost debts. There is a danger the guarantor can lose their home. Those people who were so close to financial freedom are now facing debt, and a shaky retirement.
According to the Consumer Credit Legal Centre NSW, there are many negative aspects to making the decision to go guarantor:
REMEMBER: You do not get anything out of giving a guarantee!
You do not get:
•Any rights to any of the goods or property the borrower is purchasing with the loan;
•A positive credit record;
•It will not make it easier for you to get a loan for yourself;
•It will not necessarily make it easier for the borrower to get a loan in the future.
They suggest alternative ways to help out your children or family financially without having to guarantee a loan.
“If your child asks you to guarantee a car loan for example, consider some alternatives. Perhaps you could give them an interest free loan of a few thousand dollars as a deposit, or offer to match their savings if they wait a few months, or just talk them into a cheaper car. If the loan is for a family business, talk to your accountant. Is there another way of obtaining the required funds? If a guarantee is absolutely necessary, is there some way of minimising the amount of the guarantee and/or the risk that it will be called upon?” the Centre says.
In the case of buying property, going guarantor can make a huge difference to the family member’s financial future by allowing them to break into the housing market.
The most important question to ask is: Could we make the repayments on this loan should our family member be unable to?
The second step for potential guarantors to make could be to seek third party and or legal advice prior to any agreement being made. This is to be able to make that calculated risk – and yes it is a risk, with the help of someone who doesn’t have a vested interest in the outcome (like the borrower or lender).
The Sydney Morning Herald’s Personal Loans Smart Guide provides some other points to consider when making this decision:
•How much is being borrowed?
•How responsible is the borrower?
•How stable is their employment?
•Does the borrower have any other means of repaying the loan should he or she fall ill, be injured or become unemployed?
•Can I afford to repay the total sum of the loan?
Guarantors can insist borrowers have adequate insurance to cover anything that may go wrong during the term of the loan, such as life insurance and income protection insurance.
It is also important to be clear about the amount that will be guaranteed, and that there is an ending to the time period of the guarantee.
They should also ask that a copy of all bank statements be provided to them during the course of the guarantee.
It is true there are many cases of guarantors helping out family members successfully, with the whole event posing no danger to their own homes or to their credit rating. But in this instance, it is a case of, when in doubt – don’t.
– Does the borrower have a bad credit rating?
As an alternative to using a guarantor, the borrower could look at repairing their bad credit rating. The problem is, many people who attempt to have defaults removed are told by creditors they can have them marked as ‘paid’ but that listings never get removed.
But if the borrower has a bad credit rating due to listings which have errors, are unjust or simply should not be there, they do have right to have those inconsistencies removed. It may be worthwhile for people with a damaged credit file to seek the help of a credit repairer who can assess whether they are suitable for credit repair. The borrower could have their credit file defaults completely removed, and negotiate with creditors on their behalf. The success rate is generally higher, and it could mean the borrower is able to apply for a loan on their own terms, without the need for a guarantor.
For more information on credit repair, contact MyCRA Credit Repairs – www.mycra.com.au or phone toll-free 1300 667 218 to speak to a consultant.