Being a guarantor: Be aware you are liable for the debt

If you agree to be a guarantor, you will be responsible for paying a debt if the borrower can't or doesn't.

This is far more than giving someone a character reference. It can be a serious financial risk for you.

It is important to know that, if the borrower defaults, the lender is entitled to come after you, as the guarantor, for repayment before they pursue the borrower.

If you provide a "secured guarantee" by listing items of property that can be claimed as repayment (ie security), these items will be taken from you if you cannot pay the loan.

Therefore, it is a good idea to think carefully about whether you should agree to become a guarantor for someone's debt.

The guarantee must be in writing and must be signed by you as guarantor, otherwise it cannot be enforced.

It should specify:
• The amount of money for which you are liable.
• The circumstances in which you might have to pay, for example, if the debtor defaults.
• How long your obligation will last, for example, until the debtor repays the loan in full.

Some guarantees cover all of a borrower's obligations to a lender (these are called "All Obligations" guarantees).

This means if you agree to guarantee someone's car loan, for example, you could unwittingly be guaranteeing their other personal loans and credit card debt as well.

You can ask that the guarantee agreement limits the amount you guarantee (ie "limited guarantee").

However, the lender does not have to agree to it.

If you are guaranteeing someone's loan, the lender must give you a copy of key information about the credit agreement so you know what the borrower's obligations are.

They must also give you a copy of the guarantee contract.

If the borrower misses payments and the creditor starts the repossession process, they must send you a copy of the repossession notices. If you do not receive the notices, your liability may be reduced.

As a guarantor, you have no direct control over the borrower's (debtor's) loan repayments.

You can insist on a written agreement with them, which:
• Requires the debtor to keep you informed of their financial decisions.
• Allows you to see how much money is in the debtor's accounts.
• States exactly who is responsible for which part of the loan.

It's best to seek legal advice before agreeing to be a guarantor.

For free and confidential advice and information on this or any other matter, visit the Palmerston North Citizens Advice Bureau (CAB) in Hancock Community House, 77 King St.

Opening hours, Mon-Fri, 9am-4.30pm. Call 357 0647 or 0800 367 222.

We have a free legal advice service by qualified lawyers most Thursdays at 7.30pm, and a JP is available on Tuesdays from noon to 2.30pm.

No appointment is necessary for either of these services.