Going guarantor
When you guarantee a loan you make a legal promise to step in if the person who borrowed the money doesn’t make the repayments. You become responsible for loan, and must repay it along with any interest charges and fees.
Guaranteeing someone’s loan is a very serious step. Some people have lost their homes or retirement savings through loan guarantees that went wrong.
The person borrowing the money may have every intention of repaying the loan. But things can go wrong. People can lose their jobs, get sick and be unable to work, or their business ideas might not work. If something like this happens, can you afford to step in and pay the loan?
If you are considering guaranteeing someone’s loan you should:
- Find out the maximum you might have to pay, including any penalty fees, interest and other charges.
- Find out exactly what the money will be used for, and the risks things could go wrong for the borrower.
- Check you could afford to repay the loan without risking your home or retirement savings.
If the guarantee involves a substantial amount of money or involves a loan to a business get legal advice and follow this advice.
Saying no to a family member may cause ill feeling. But this will be nothing like the ill feeling that could be created if things go wrong and you lose some of your hard-earned savings repaying someone else’s loan.
Consider a compromise. Perhaps you could donate something towards the deposit so your daughter or nephew doesn’t have to borrow so much. That’s a win-win situation. You substitute a smaller, known loss for a risk of very large losses and your relative has a smaller loan, less interest to pay and is more likely to be able to repay the loan.
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