The pitfalls of going guarantor on a loan

My son has applied for a business loan and has asked me to go co-guarantor. What happens if I do?

Before you sign any documents that even look like a guarantee, you should think carefully about the implications of it for your finances.

The implications are many and could keep you awake at night.

Signing as co-guarantor will make you legally responsible for paying back the entire loan if your son fails to make the repayments. You will also be up for any fees, charges and interest the lender demands as a result of default.

Being a guarantor does not get you anything, except perhaps the gratitude of your son. You don't have any rights to own the property or items bought with the loan. You won't get a good credit record if the borrower pays off the loan.

But you may end up with a bad credit record if the loan is not repaid. The loan will be listed as a default or non-payment record, making it harder for you to obtain credit for several years.

And if you hand over the title deeds to your home to guarantee your son's loan (lenders love real estate security well beyond the amount of the loan provided) you may not be able to use your home as security for any loan you may seek.

You may even end up losing your home if you don't pay out your son's loan if his business fails.

What other options do I have? I want to support my son in his business enterprise, but I don't want to run the risk of losing my home or my credit rating if I do.

You could borrow an amount in your own name that you can manage to repay if your son's business goes bad and he is unable to repay his loan. He may be short of, say, $50,000. You could borrow this amount and on-lend it to him.

If his business fails, and he can't repay you the $50,000, that is all you will lose. Your son's lender will not be able to come after you for any shortfall in his ability to repay his loan, as you have not signed a guarantee.

That will leave you losing $50,000, but it means you can also contain your loss to that figure.

It is a good idea to think about what losing the loan you have extended to your son will do to your relationship.

There may be a lot of pressure on you to provide the extra loan, but it may be better to say "No" now and avoid damaging your relationship, even though it is a tough call. Never sign an open-ended loan agreement such as an overdraft as this will leave you exposed to an unlimited debt.

If I have signed an open-ended guarantee, in what situation can I avoid liability?

If you speak English and you can read legal documents, there is little chance of you climbing out of your obligation to be liable for any shortfall your son could not meet.

If you can demonstrate that you only agreed to sign as a result of pressure or fear, or you suffered from a disability or mental illness at the time of signing, you did not receive legal advice before signing and did not understand the documents or the extent of the risk you were taking on, or you believed the credit provider or broker used unfair tactics or tricked or misled you, you may be able to challenge the lender's call on your guarantee.

However, usually this process involves a court proceeding that will cost you money.

What questions do I need to ask before going guarantor?

• How does the borrower intend to repay the loan?
• What do I know about the business?
• How can I repay the whole amount owed if my son is unable to repay the loan?
• Do I really want to do this or should I say "No I can't right now"?

For further help if the bank will not help, you can call the Consumer Credit Legal Centre in your state or territory, or alternatively the Financial Ombudsman Service for advice on 0800 234 567 for free fixed line calls and 0300 123 9 123 for free mobile calls.

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