What is a guarantor?
A guarantor is a person who agrees to be responsible for the debt of another person.
Being a guarantor is a serious obligation. If the borrower fails to meet their payment commitments under a credit contract, the guarantor may be required to pay the debt, or the lender may be able to seize (“repossess”) and sell any property that the guarantor has put up as security for the debt (see “Repossession” in this chapter).
Lenders may require a guarantor if, for example, the borrower:
- presents an unacceptable credit risk (has a bad credit history), or
- doesn’t meet the lender’s lending criteria, or
- is under 18 years old (see “Legal ages” on the Youthlaw website at www.youthlaw.co.nz/your-rights).
What should you know before entering a guarantee?
If you agree to be a guarantor there are some things you could do to prepare. You should:
- read the contract carefully to be sure of all your obligations,
- know how much you are promising to repay (by carefully reading the contract of guarantee). You might be agreeing to guarantee one loan or all of the borrower’s debt with that lender called an “all obligation guarantee”. This means that if you agree to guarantee someone’s car loan, you could also be responsible for other personal loans they have with that lender, and
- be aware of the reasons why the borrower is required to have a guarantee, for example, they might have a bad credit history.
If you are feeling pressured to sign a guarantee it is a good idea to get independent legal advice, for example, from a Community Law Centre. It’s also a good idea to get a written agreement with the person asking you to be a guarantor.