A guarantee is a common way for Lenders to help borrowers increase their borrowing capacity, reduce deposit requirements and to help with the loan approval. There are several types of guarantees:
This guarantee is more common in home loan lending, parents offer equity in their own property to help avoid lenders mortgage insurance (LMI) and reduce the borrowers deposit requirement.
A guarantee provided by an individual to another individual or corporate entity. Personal guarantees are commonly used among finance companies, providing finance for consumer borrowers.
A guarantee generally required to be provided by Directors of a Corporate entity when the entity is the Borrower. A Directors guarantee is required in the event the Corporate borrower defaults on the loan.
These forms of guarantee are used in more complex Lending, when the borrower is a corporate entity (Pty Ltd) and the income of related entities are required to be captured under the lending contract.
Is a guarantee provided that is limited to an agreed value. This form of guarantee is commonly used in home loan lending and parental guarantees.
What you need to know before you go Guarantor.
Prior to providing your guarantee to a Borrower you should consider your options carefully. Who are you guaranteeing? And why are you guaranteeing them?
Are you familiar with their previous credit history and what is their current financial position? Discuss with your Broker or Banker and discuss the alternatives to going guarantor as well as the obligations of being a guarantor. Lenders will provide you with some information about the obligations of being a Guarantor, before applying for the loan.
You should also understand the options available to you, for removing the guarantee in the future.
Familiarise yourself with the terms of the loan – what is the interest rate, the loan term, fees and the total amount payable for the loan over the loan term.
What are my obligations of being a guarantor?
As a guarantor for an individual or corporate entity you are obliged to make the repayments for the loan in the event the borrower defaults. The lender can call on the guarantee if they have exhausted all avenues of collection from the borrowers, and you may be responsible for the entire loan repayment.
If the borrower defaults on the loan, this could affect your credit rating.
Should I seek independent legal and financial advice?
Always consult an independent legal and financial adviser to fully understand the obligations and requirements, as a guarantor.
Can my credit score be affected?
If the borrower defaults on the loan and you do not make the repayments (as the guarantor) then the Lender may issues defaults or arrears notices, which can impact the credit file and score of all parties associated to the loan; including the guarantors.
Can I guarantee my child’s car loan?
Many finance companies have removed this as an option due to implications raised during the Hayne Royal commission. If the Borrower cannot qualify for a loan, then perhaps they should not be looking to purchase the car in the first place. Lenders would rather the borrowers apply in their own name and provide a deposit as an alternative to a guarantee.
Can I remove my guarantee during the loan term?
It is possible to remove the guarantee on a loan if the loan can be refinanced to another lender. With most loan types it is not possible to just remove your guarantee without a new loan being established (to repay the old loan). A full application from the borrowers is generally required to see if they warrant the loan in their name only. However, a home loan guarantee may be different. You can apply to have the Guarantee removed (discharged) during the loan term if their is sufficient equity in the borrowers property.
Guaranteeing a loan is a big responsibility. Ensure you fully understand your obligations under the guarantee, and always seek independent legal and financial advice.
The information is intended to be of a general nature only. We do not accept any legal responsibility for any loss incurred as a result of reliance upon it – please make your own enquiries.
Any advice contained in this document has been prepared without taking into account your particular objectives, financial situation or needs. For that reason, before acting on the advice, you should consider the appropriateness of the advice having regard to your own objectives, financial situation and needs.