How To Protect Yourself As A Loan Guarantor
Becoming someone’s guarantor should not be taken lightly; it is far riskier than simply giving a character reference.
*Try to limit your liability: Many guarantees cover all of a borrower’s obligations to a lender (these are called “All Obligations” guarantees). This means that if you agree to guarantee someone’s car loan, you could be unwittingly guaranteeing their mortgage, other personal loans and credit card debt as well. You can ask that the guarantee agreement limits the amount you guarantee (i.e. “limited guarantee”).
- Make sure you receive the documentation: When guaranteeing a loan, the lender must give you a copy of the credit agreement so that you know what their payment schedule is, and also a copy of the guarantee contract (a contract of guarantee must be in writing and must be signed, otherwise it cannot be enforced).
- Take care in choosing security for the loan or credit contract: If you provide a ‘secured guarantee’ by listing items of property that can be claimed as repayment (i.e. security), they will be taken if you cannot pay the loan. Because of this, it is important you do not list any items worth more than the debt, for instance your house.
- Get a written agreement with the borrower: As a guarantor, you have no direct control over the borrower’s loan repayment. 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; and states exactly who is responsible for which part of the loan.