Guaranteeing a loan for family

Guarantor or co-borrower

Families are sometimes asked to sign in one of two ways, and Legal Aid NSW draws the line between them.

Legal Aid NSW adds a point that is easy to miss: paying someone else’s loan can be treated as a gift and may affect your Centrelink payments.

The warning above your signature

Regulation 81 requires every guarantee covered by the Code to carry the warning in Form 8, set inside a box immediately above the place where the guarantor signs, on the same page. Among its lines is this one, quoted from the Regulations:

The same warning tells the guarantor that they may be able to withdraw or limit their liability, and that a change to the loan which increases what they owe does not bind them unless they agree in writing.

What the lender must give you

1. Before you signA copy of the credit contract (or the proposed one) and an information statement in the prescribed form, headed “Things you should know about guarantees”. Without the contract copy, the guarantee cannot be enforced.
2. When you signThe guarantee must be in writing and signed by you.
3. Within 14 days afterA copy of the signed guarantee and of the credit contract, unless you were already given copies to keep.

Your rights under the Code

• Withdrawing. By written notice, before the lender first provides any credit; or afterwards, if the contract actually made differs in a material way from the proposed one you were shown before signing. (Section 58)
• A ceiling on what you owe. A guarantee is void to the extent it secures more than the borrower’s liabilities under the contract plus the reasonable costs of enforcing the guarantee, or any lower amount agreed. (Section 60)
• No silent increases. If the loan is changed to increase what is owed, your liability does not rise unless the lender sends you written details of the change and you accept in writing, apart from some changes the Code lists. (Section 61)
• No future loans by stealth. A clause extending the guarantee to a later loan does not bind you for that loan unless you were given its contract and accepted in writing. (Section 59)
• Limiting a card or overdraft guarantee. For continuing credit, such as a credit card or overdraft, you can give notice limiting the guarantee to credit already provided plus any further amount you agree to. (Section 60; Form 9)
• Getting your money back from the borrower. A guarantee is void to the extent it limits or delays your right to be indemnified by the person whose debt you guaranteed. (Section 60)
• A statement of what is owed. You can ask the lender at any time; it must answer within 14 days if the request covers the past year or less, otherwise within 30 days, and a fee may apply. (Form 9)

Where the borrower was under 18 when the debt was incurred, the guarantee can be enforced only if it states prominently that the guarantor may not be entitled to be indemnified by the borrower. (Section 60)

Questions to settle before signing

Moneysmart suggests getting a copy of the loan contract from the lender well before signing, and asking questions until every detail is clear. In our own words, its checklist covers:

• whether you could meet the repayments yourself, counting interest, fees and charges
• the exact amount guaranteed, when it may fall and when it can end, since a guarantee can sometimes cover only part of a loan
• which of your assets would be security, such as your home
• the loan’s term, taking particular care over an overdraft or any other loan with no set end date

Moneysmart also points out that a guarantee can count against you when you apply for credit yourself, and that a default on the guaranteed loan can be recorded on your credit report. Pressure to sign may be a sign of financial abuse.

If a guarantee has gone wrong

Moneysmart lists situations where a guarantee may be open to challenge: signing under pressure, threats or fear; signing while living with a disability or mental illness; signing without legal advice and without understanding the documents or the risk; or being misled by the lender or a broker. It points to free legal advice. In NSW, Legal Aid NSW is one place to start.