Going guarantor

If you're considering guaranteeing other people's finances, ask yourself: are you able to pay if things go wrong?

It is common for older people to be asked to be a credit contract guarantor for a family member, usually a child or grandchild.
When you sign a form to be a guarantor you are doing much more than just witnessing a document or providing a character reference. In fact you are agreeing to repay the mortgage/loan/hire purchase of the borrower if they cannot or will not repay their debt.
Similarly, older people are sometimes asked to be guarantor for telephone or electricity accounts or are asked to have a connection for another family member put under their name. If the person you are guaranteeing defaults on the payments, you will have to pay even if you can’t afford to.

Questions you should ask yourself

  • Why are you being asked to be a guarantor?
  • Are you being coerced or emotionally blackmailed? (For example, do you feel obliged to help out family, even if you know there is a high risk they can't/won't pay?)
  • Why is a guarantor required - is there a bad credit history?
  • Is the borrower realistic about the repayments - can they afford them even if things go wrong? (For example, what happens if they lose their job?)
  • How mature and responsible is the borrower?
  • Is the loan for a need or a want? 
  • Is the loan for a new business? (Many new businesses don't succeed.)
  • Is the loan for an existing business? (If the business is viable, there should be enough capital in the business to secure a loan without a guarantor.)
  • Can you afford to pay any default on the part of the borrower?

The reality of acting as guarantor

  • If you act as guarantor for a phone or power connection, you will have to pay any large toll or service accounts that the person you are acting for can’t/won’t pay.
  • If you are acting as guarantor for a bank loan, it is common that the amount guaranteed is unlimited and includes future borrowings (e.g. extra interest on an overdraft). If the borrower defaults, the bank can demand repayment from the guarantor and does not have to exhaust other remedies first.
  • As well as having to pay the amount borrowed, you will also be responsible for debt recovery costs.
  • Anything you list as a security can be taken and sold to pay the debt. This could even include your home if you use it as security.

A good rule of thumb is: only act as guarantor if you can write a cheque for the amount you are guaranteeing at the time you are asked to act as guarantor.

Taking action when things go wrong

If you have signed an unwise guarantee it's important to get legal advice immediately as there may be legal remedies available. Your local Community Law office can help with this.
The lender must also keep guarantors informed about problems with the mortgage/loan/hire purchase repayments so it's vital to act quickly before matters come to a head.