Loans involving family & friends
Love and loans
Has a family member or friend asked you to be a 'co-borrower' or
guarantee a loan for them? Before you say yes, think carefully -
you could lose not only your money, but valuable assets such as
your house or car.
What is a guarantor or
You are a co-borrower if you sign a loan with someone else.
In most instances both you and the other co-borrower are jointly
and individually liable for the debt. If the person you borrow the
money with is unable to pay their share of the loan, you will be
responsible for repaying the full amount outstanding.
If a credit provider is not willing to give a loan to a person
on their own, they may ask for a guarantee. If you sign a guarantee
for a friend or family member, you are known as the 'guarantor' of
When you sign your name as a guarantor, you are legally
responsible for paying back the entire loan if the other person
cannot or will not make the repayments. You will also have to pay
any fees, charges and interest.
As a guarantor you don't have the right to own the property or
items bought with the loan.
Reasons you might have to say
Think very carefully before guaranteeing a loan. Is there
another way you could help without becoming a guarantor? For
example, could you contribute to a deposit so that a guarantee is
Consider how you will pay back the loan if your friend or family
member can't. Can you afford the repayments? Do you have savings
you can use or assets you can sell to pay the debt? If you do have
to use your own money or assets to pay off someone else's loan, you
could be risking your financial future.
What about your relationship with the borrower if something goes
wrong? It may be better to say 'no' now and avoid damaging your
The affect on your future loans and credit report
You will need to tell your credit provider about any loans you
are a guarantor for, when you apply for credit. They may take into
account the loan repayments on the loan you have guaranteed when
they assess your ability to repay a new loan. This may stop you
getting a new loan even if the person who's loan you are
guaranteeing is making the repayments.
You may end up with a bad credit record if you and the borrower
can't pay back the guaranteed loan. The loan will be listed as a
default or non-payment on your credit report, making it hard for you to
borrow money for several years.
You may also affect your credit score, a number based on an
analysis of your credit file, at a particular point in time, that
helps a lender determine your credit worthiness.
If you provide security, such
as a mortgage on your home, to guarantee someone else's loan, you
may not be able to use your home as security for your own loan. You
may even end up losing your home if you don't pay out the
You may also be made bankrupt by the credit provider. Even assets
you haven't offered as security for a guarantee may then be sold to
pay the outstanding debt.
Case study: Connie guarantees a business loan for her son
Connie's family ran cafes for years until her late
husband became too ill to work. Her son Leo grew up working for the
family business, and Connie thought he could make a go of it. But
she didn't know he had a gambling problem.
A few months after Connie guaranteed a business loan for him,
Leo fell behind in his repayments. Then he was evicted from the
cafe for not paying rent. She asked relatives to contribute to
Leo's repayments but even with their help, there was not enough
money to pay off the debts.
The bank and landlord contacted Connie to pay back what was
owed. Connie is talking to the bank about repayment arrangements,
including postponing enforcement proceedings, but is resigned to
the fact she may have to sell the family home to pay off Leo's
Questions you must ask before you
sign the loan
Before you guarantee a loan, ask the credit provider the
Q. What type of loan am I guaranteeing?
Be very careful about guaranteeing a loan that has no specific
payback time, such as an overdraft. This kind of loan could
potentially go on forever.
Q. What should I check if I am asked to guarantee a
Find out everything you can about the business. Ask for a copy
of the business plan to understand how it intends to operate. It's
also important to look at the business' financial state. For
example, check past financial statements and speak to the business'
accountant to make sure the company is in good financial health and
has good prospects.
Q. Is the guarantee for a fixed amount of money, or is
it for the total amount owing?
You are better off guaranteeing a fixed amount because you will
know exactly what you owe. If you sign a guarantee for the total
amount owing, you will be legally responsible for what the borrower
owes now and in the future. This could include interest, fees,
charges and penalties. If you think there has been an increase in
the amount you agreed to guarantee without your consent, seek legal
advice straight away.
Q. Exactly how much am I guaranteeing?
The guarantee should clearly describe how the amount of money
you owe will be calculated if the worst happens and the borrower
does not pay. If you are not comfortable with the amount, ask if
you can reduce it.
Q. Do I have to put up assets as security?
If the loan is not for personal, household or domestic purposes,
you may be asked to put up an asset such as your house as security.
This means the credit provider can sell your house to pay the debt
if the borrower defaults on their loan.
Q. What should the loan contract tell me?
Get a copy of the loan contract from the credit provider. It
should tell you:
- The amount of the loan
- The interest rate, fees and charges
- Whether the loan is secured (where the borrower has to put up
an asset, such as their house, as security)
- How long the borrower has to repay the loan
- The amount of the repayments
How to get free legal advice
Never let a family member pressure or force you into signing
anything. If a large amount of money is involved, talk with a
lawyer or get free legal advice so you understand
the risks you are taking on. If you're feeling pressured, seek
financial counselling - it's a free and confidential service.
Challenging a claim
In certain situations, guarantors may be able to challenge a
claim even though they have signed contracts.
You should get advice immediately if you:
- Only agreed to sign through pressure or fear
- Suffered from a disability or mental illness at the time of
- Did not receive legal advice before signing and did not
understand the documents or the extent of the risk you were taking
on; for example, you thought you were guaranteeing a certain amount
but a much larger amount is now being claimed
- Believe the credit provider or broker used unfair
tactics, or tricked or misled you
Read our case study on lending
money to family and friends where Gwen lends her son some money
after seeking advice from a financial counsellor.
What to do if a personal
relationship breaks down
A breakdown in your personal relationships affects every part of
your life, including your finances. If you were a guarantor or
co-borrower for your ex-partner, you may be liable for their debts
if they can't or won't repay their loan.
In most cases, you won't be able to get out of loan contracts
you made in the past, but speak to a lawyer or get free legal
advice about where you stand. Also see divorce and
separation and relationships and money for
Stop and think before agreeing to be a
co-borrower or to guarantee someone's loan. If they cannot or will
not pay off the loan, you will be responsible for the debt. Take
the same care that you would if you were taking a loan out for
Last updated: 10 Mar 2017