22nd Jun 2017
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Is being a guarantor really something you should consider
Author: Rod Cunich
signing a loan as guarantor

Before looking at the pros and cons of guarantees let me first set the scene.

We sign guarantees to underwrite the ability of someone (often a loved one, close friend, or even a business partner) to borrow money or enter into a legal arrangement, which creates hefty obligations for the person you are guaranteeing.

I’ve interviewed more guarantors than I wish to remember and, more often than not, they believed they were morally ‘supporting’ the person rather than actually ‘underwriting them’ in a cold, unforgiving financial sense.

So why do banks, landlords and financiers ask for guarantees? There is no rocket science here. Put simply, the ‘big brother’ in this scenario doubts your loved one can honour their legal and financial obligations. If they didn’t have the doubt, there would be no need for a guarantee. And if they fail in their obligations, big brother wants to be able to call on you to make good for them. So in reality, a guarantor is big brother’s insurance policy. Their safety net.

A request for a guarantee should ring very loud alarm bells. The question isn’t, ‘Should I do this because I love the person or feel obligated because they asked me, and they need me?’ The questions should be:

  • Why is a guarantee required?
  • What is the risk that I may be called upon to pay out money under the guarantee?
  • If called on to pay out, can I afford the payment without causing myself serious financial hardship?

And I’ll let you in on something. A reassurance (with or without a reassuring cuddle) from your loved one (or the big brother for that matter) that ‘it will be fine, you have nothing to worry about, it’s just a formality’ is reason alone to say “No”.

If you have objectively assessed the risk after proper investigation and you can afford to pay out if a call is made on the guarantee – then by all means go ahead, lend all the support you can afford. If you don’t tick both these boxes consider the alternative … use your wealth to buy lottery tickets.

Am I ‘anti bank’ or anti ‘big brother’ – absolutely not. I have worked for such organisations and I understand how they work. The danger is, many guarantors don’t.

Giving a guarantee is a serious, potentially dangerous financial transaction, not a loving gesture of good will.

The upside of providing a guarantee (the ‘pro’ if you will) is that you can help someone achieve something they can’t without you, whether a new home, a new business or a new… anything.

The down side (‘con’) is that if things go pear shaped and you can’t afford to pay-out the required money, then your loved one’s problem becomes yours.

After working as an insolvency lawyer for decades, both for and against banks, I have developed a very cynical attitude – if someone signs a guarantee after I’ve explained it to them, I’ve failed to explain it properly.

Cynicism aside, guarantees play a valuable role as they often enable people to ‘get a start’ or ‘get ahead’. That’s a plus. Assess any request you receive, and if you are satisfied the ‘odds’ are good and you can afford ‘the hit’ if it comes – go for it.

The danger is that people agree to give guarantees without understanding the risk and not assessing whether they can honour a call under the guarantee without destroying their own financial position. They don’t focus on the reality, that things can and do go wrong.

I’ve been involved with too many parents losing their homes and savings, and living their twilight years in poverty, not to have very strong views about this issue.

My advice is: make the assessments and be prepared to say ‘no’. Do not say ‘no forever’ because the next request might be for something more affordable for both parties. Reassessing and resetting expectations is part of the process of negotiating whether you provide a guarantee.

Remember: divorce isn’t the only cause of sexually transmitted debt. Being overzealous to help family and friends with a guarantee is equally disastrous.

If you learned a lot from reading Rod’s article, then you should hear him speak! See him and other YourLifeChoices’ experts live at the Sydney Retirement Bootcamp on 15 July and you could have your own questions answered on retirement, estate planning and much more.

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    COMMENTS

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    MICK
    30th Jun 2017
    12:09pm
    Been there, done that.
    In our case this involved a partner. We managed to get out but it cost us dearly, including a relationship with the son we had nurtured for 25 years.
    My advice is to say NO. You might be derided for this but you will likely save a relationship with your child, let alone your partner, as well as not having your retirement destroyed.
    We have learned one thing from this: unless all family members have the same values, INCLUDING PARTNERS, then a Guarantorship is a hand grenade waiting to explode. Not worth the risk. And remember that your children should make their own lives as well...like you did.
    AutumnOz
    30th Jun 2017
    1:10pm
    Many years ago I said No when one of my children wanted me to guarantee a loan for a house.
    Having known this child lifelong I knew she couldn't be trusted to keep up the payments, however I did offer to help with payments provided my name went onto the deeds along with hers - she refused so I said No to either guaranteeing or co-payments.
    Think long and very hard about letting yourself in for going guarantor for any of your children especially if they are likely to get into a relationship which could leave you responsible for paying off whatever asset the child wanted to acquire.
    HDRider
    30th Jun 2017
    1:39pm
    Anyone with half a brain would say NO, business is business and love is bullshit! Just asking someone to do this will strain any relationship.
    trood
    30th Jun 2017
    2:54pm
    NO, NO. NO!
    Old Man
    30th Jun 2017
    3:12pm
    I worked with a financial institution and was required to arrange signing of guarantees from time to time. I firstly asked the intended borrower if the proposed guarantor could see all of the loan application and this request was never refused. I then ensured that I spoke to the prospective guarantor without the intended borrower present and explained fully the financial position of the borrower as well as the financial obligations of a guarantee. The important part of the guarantee was that the last part of the debt needed to be paid. Some proposed guarantors had been led to believe that there was a shortfall in security and once that little bit had been repaid that they were "off the hook".

    Quite a number of proposed guarantors said that they had been talked into the deal and didn't know how to get out without putting a friendship/relationship at risk. In these cases I lied to the loan applicants by telling them that the guarantor was unsuitable. It was a lie that I had discussed with the prospective guarantor and one I could live with. After seeing what can happen to guarantors, I could never be a guarantor or recommend that anyone else take on that role.
    Barbara Mathieson
    30th Jun 2017
    11:17pm
    Relationships can, and do go,pearshaped . Starry eyes don't last forever! It's called love...
    Caveat Emptor should apply in 'guarantor ' cases for anything!
    Liverpool Anne
    1st Jul 2017
    10:19am
    No No No. I have known so many that went drastically wrong and the guarantor ended up with nothing. I was brought up with the words, you do not lend huge amounts of money to family or friends without consulting a solicitor. Good advice which has held me in good stead
    Rube
    2nd Jul 2017
    7:59am
    I was considering going guarantor for my niece but for only for $50,000 deposit for a house. She is very responsible and I have considered if she defaults and I would be able to manage to pay back this amount without jeopardising my house. However I'm not sure whether I can limit my responsibility to only the $50,000 and not the rest of the house?
    Old Man
    2nd Jul 2017
    11:28am
    Yes Rube, there is such a thing as a limited guarantee but most financial institutions don't like them.


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