Becoming a guarantor for a loan is a significant decision involving considerable financial risk. Before agreeing to become a guarantor, it is important that you under your obligations, how that looks under a loan contract and understanding the risks associated.
What is a guarantor?
A guarantor can be a person or company, commonly used by lenders to ensure the loan is repaid if the borrower is unable to pay the loan.
A common example of this is where parents are asked to be guarantors for their child’s first home purchase.
What should I look out for before signing as a guarantor?
Guarantors should review if they can meet loan and interest repayments if the borrower fails to pay. It is important to be aware of the loan amount, the portion that is being guaranteed and the repayment term.
Generally, for a guarantor to be released from the loan, the loan must be repaid in full.
We encourage all guarantors to seek independent financial advice before entering a loan contract, as failure to do so may result in serious financial loss.
The lender may also require a guarantor to offer their property or other assets as security under guarantee. This essentially authorises the lender to sell your property if you do not have the ability or funds to repay the debt.
Withdrawing clauses or policies
Depending on the lender, a guarantor may be able to withdraw from the loan agreement. Your solicitor can advise you whether this clauses exists when you are seeking advice on the guarantor documentation.
Guarantors should be aware of time limitations and the steps necessary to affect this if required.
Borrower’s Financial Position
It is important for guarantors to be informed of the borrower’s financial position and know that the borrower can repay the loan entirely, before considering whether the be guarantor for the borrower.
Additionally, it is crucial for guarantors to understand if the borrower has a backup plan, other than the guarantor stepping in to resume the borrower’s responsibilities, should they fail to make repayments.
Due to the risks involved, we recommend both guarantor and borrower to be transparent with each other so an informed decision can be made.
How can W Legal Group Help?
As each loan agreement is unique and tailored to individual circumstances, obtaining independent legal advice is essential.