When engaging in purchases, lending, and similar activities in Australia, you may find yourself needing a guarantor or being asked by relatives or friends to act as one. Many people, out of a sense of obligation, agree to guarantee someone else in a muddled way and ultimately end up shouldering the consequences. Keep in mind that acting as a guarantor for another person is an extremely significant and risky matter, and should be approached with the utmost caution. Today’s article helps you clear the minefield so you can avoid becoming the fall guy!

Case Study

Mr A wanted to start his own business and needed capital, but he could not come up with that much money at once, so he decided to borrow funds to run the business. Mr A approached an Australian lending company to borrow money. The lender issued a loan contract and required Mr A to provide a guarantor to co-sign the agreement.

Mr A asked his relative, Mr B, for help and to act as his guarantor. Mr A told Mr B: “All you need to do to guarantee me is sign the contract — it’s just a formality, very simple, and won’t cause you any loss.” Mr B felt it was a close relative asking for help, and Mr A had previously helped him out in life, so he found it hard to refuse. Believing Mr A to be trustworthy, he agreed to sign without much thought and became Mr A’s guarantor.

Unfortunately, Mr A’s business later failed, leaving him with hundreds of thousands of Australian dollars in debt that he could not repay. The lender then came to Mr B and demanded he repay the debt on Mr A’s behalf. Suddenly faced with hundreds of thousands of dollars in debt, Mr B was at a complete loss and left in tears…

Using the above case as a starting point, let’s look at the risks of guaranteeing others and the key points to watch out for:

1. What is a guarantee and what forms can it take?

A guarantee is a legal mechanism that ensures the repayment of debt and the realisation of creditors’ rights. A guarantee is a simple security document that sets out the conditions under which the guarantor must take on the borrower’s repayment obligations if the borrower defaults. The lender expects the guarantor to be able to perform their obligations under the guarantee. As a guarantor, however, you will want to be as certain as possible that the borrower will fulfil their repayment obligations.

A guarantee can be provided by the following:

an individual;

a company; or

other types of corporate entities.

Note: You should try to avoid providing a personal guarantee (as in the case above), because this type of guarantee may expose the guarantor’s personal assets to the creditor.

2. What are the risks of acting as a guarantor?

1. Taking on repayment liability

Acting as someone else’s guarantor means using your personal credit to take on joint and several liability for another person’s debt. So if the borrower fails to repay the loan on time, or even “disappears,” the guarantor must take on the corresponding repayment obligations and liability on their behalf. Just like Mr B in the case above — because the borrower, Mr A, was unable to repay the loan, the guarantor Mr B had to take on the repayment liability.

2. Impact on personal credit record

If the borrower makes late repayments or fails to repay the debt, that record will also appear on the guarantor’s credit history.

3. Loss of personal assets

If the guarantor has used their personal property as collateral for the borrower, and the borrower ultimately cannot meet the debt, the guarantor’s personal property may be sold off through auction or similar means.

4. Impact on loan applications during the guarantee period

When the borrower cannot repay the debt, the guarantor must take on the repayment responsibility. If the guarantor has high liabilities at that time and wants to apply for their own loan, it may affect the loan amount, term, and interest rate available to them, or the loan may be refused altogether.

3. What should you watch out for when guaranteeing someone?

1. Before guaranteeing, fully understand the type of guarantee you will be providing, and be clear about the legal responsibilities and obligations you will take on as a guarantor, as well as the consequences.

2. Carefully investigate the borrower’s creditworthiness. The higher the borrower’s creditworthiness, the smaller your guarantee risk is likely to be. Even if the borrower is a very close friend or family member, you should still carefully examine their credit position, and never agree lightly simply out of good will or sentiment.

3. Carefully assess the borrower’s ability to repay the debt and their actual financial position, in other words, estimate whether the borrower is capable of repaying the debt. This requires a comprehensive understanding beforehand of the borrower’s loan amount and financial position (including savings, property, vehicles and other assets).

4. The guarantor can require the borrower to provide collateral, thereby creating a counter-guarantee.

5. The guarantor can suggest that the borrower also find several additional guarantors to share the risk jointly.

6. During the performance of the contract, the guarantor should be clear about the rights they can exercise. For example, be aware of the clauses in the guarantee contract relating to the release of guarantee liability; regularly check on the borrower’s use of the loan and whether they are performing the contract. If you discover that the borrower is not performing the contract properly, measures such as freezing assets or preservation orders can be taken.

Finally

In summary, acting as a guarantor for someone else is a risky matter. Many guarantors, out of personal sentiment and a lack of legal awareness, take the consequences of guaranteeing lightly and, banking on a lucky outcome, agree to guarantee others — only to end up shouldering serious consequences and repaying debts on someone else’s behalf. Some borrowers even lack integrity and deliberately play the emotional card to trick others into guaranteeing them, using this to escape their debts and have someone else repay on their behalf for their own benefit. Therefore, before agreeing to be a guarantor, you should have a thorough grasp of the guarantee contract and the borrower’s debts and financial situation, and it is recommended that you seek the assistance of a professional lawyer.