Factsheet: Love and loans
ONLINE TEXT VERSION - August 2011
Has a family member or friend ever asked you to
be a co-borrower or to guarantee a loan for them?
Before you agree to be a guarantor or co-borrower on a loan,
think carefully - you could lose a lot.
Connie agreed to guarantee a business loan for her son
Our family ran cafés for years until my late husband became too
ill to work. My son Leo grew up working for the family business. I
thought he could make a go of it. But I didn't know that he had a
gambling problem. A few months after I signed the business loan for
him, Leo got behind in repayments. Then he got evicted from the
café for not paying rent. The bank and the landlord contacted me to
pay back what was owed. I'm afraid I'll have to sell my house to
pay it all off.
How does being a guarantor work?
- If a lender thinks a borrower may not be able to repay a loan,
they will ask for a guarantee.
- If you sign a guarantee for a friend or family member, you are
promising to pay the entire loan back if they
cannot or will not do so, along with any fees, charges and
interest. And if your guarantee is secured against an
asset like your home, you may end up losing it or other
assets if you don't have the money to pay out the loan you've
guaranteed. You may also be made bankrupt by the
credit provider, which means that even assets that have not been
offered as security for the guarantee may be sold to pay the
- Being a guarantor does not give you anything. You do
not have any rights to own the property bought with the
loan, nor will it give you a good credit record if the borrower
pays off the loan. You may however, end up with a bad credit record
if the borrower doesn't pay and you cannot. Being a guarantor may
interfere with your ability to get a loan, as the guarantee is
recorded as your debt. You may have also had to surrender the title
deeds to your home, which will mean you may not be able to use your
home as security for a loan of your own if you need one.
How does being a co-borrower work?
- As a co-borrower, you will be legally responsible for the whole
debt if the other person does not make repayments on the loan, not
just your share. If neither of you can pay the debt, you will
probably end up with a default listing on your credit report,
making it hard to borrow money for several years, and you risk
being made bankrupt.
Do not sign a loan as a co-borrower unless you are also getting
a share of the benefit (such as sharing ownership of a house or
TIP: Think carefully before guaranteeing a loan
- Think very carefully before giving a guarantee if you are at
risk of losing your only home if the borrower does not pay.
- Do you need to give a guarantee? Is there some
other way you could help without going guarantor? For example, you
might be able to contribute to a deposit so that it is bigger and a
guarantee is not required.
- Find out how the borrower intends to repay the
loan. Do they have a regular income, for example?
- You must be able to pay back the loan if the borrower cannot.
This could mean selling assets, such as a house or car.
- Do you have a plan for how you will repay the debt if
the borrower does not pay?Some options to consider:
- Do you have assets you don't need that you can sell to pay the
- Do you have savings to cover the debt?
- Can you afford to make the repayments on the loan if the
borrower stops making repayments?
- If you are being asked to guarantee a business
loan, make sure you find out everything you can about the
business. For example, check the past financial statements and
speak to the business's accountant for an outsider's opinion.
- If you still want to go ahead with the guarantee, you should
enquire about whether you can reduce the amount you are
guaranteeing. It is worth trying to negotiate a lower amount.
- Think about the possible effect this guarantee may have on your
relationship with the borrower if something goes
wrong. It may be better to say 'no' now, rather than having a more
damaging disagreement later if things go wrong.
- Never allow a family member to pressure or force you into
signing anything that you don't want to sign. If a large amount of
money is involved, talk with a lawyer or get free legal
advice to make sure you understand the risks you are
taking on. Consult a community legal centre (see www.naclc.org.au), your state's
Legal Aid office (see www.nla.aust.net.au) or look in the front
section of your telephone directory for legal support
- If you're feeling pressured, see a free
financial counsellor or go to your local community legal centre for
help. You can also find out more about financial counselling by
contacting Financial Counselling Australia (see www.
financialcounsellingaustralia.org.au) or calling ASIC's Infoline on
1300 300 630.
- In certain limited situations, a guarantor may be able to
challenge a claim for payment of a guarantee even
where a contract was signed. You should get legal advice
immediatelyif, at the time you signed a guarantee, you:
- suffered from a disability or mental illness
- only agreed to sign through pressure or fear
- did not understand the nature of the documents, or the extent
of the risk you were taking on, and did not receive legal advice
before signing (for example, you may have thought you were giving a
guarantee limited to a certain amount of money but a much larger
amount is now being claimed, or you believe that the credit
provider or broker used unfair tactics, or tricked or misled you
when arranging the finance).
What to ask the credit provider before you guarantee a
|What type of guarantee are you
Is the guarantee for a fixed amount of money,
or is it for all monies? You are better off guaranteeing a fixed
amount because you will know exactly what you owe. If you sign an
all monies guarantee, you may be legally responsible to pay all
amounts the borrower owes now and in the future. This could include
interest, fees, charges and penalties.
If you believe that there has been an increase to the amount you
have agreed to guarantee without your consent, seek legal advice
|What's the exact amount you're
||The guarantee should clearly state the exact
amount of money you will owe if the worst happens and the borrower
does not pay.
Could you lose assets?
|You may be asked to provide a
mortgage over your house as a guarantee. So you
may have to sell your house to pay the loan if the borrower does
|Do you have a copy of the
The loan contract should tell you the amount of the loan and the
loan contract? interest rate on it, and whether the loan is
secured (which means that the borrower is
providing an asset, such as their house, as security).
It should also state the term of the loan - how
long the borrower has to repay the loan - and the amount of the
|What type of loan are you
||Be very careful about guaranteeing a loan that has
no specific period guaranteeing? of time in which it needs to be
repaid, such as an overdraft or a line of
credit. This kind of loan could theoretically go on
What happens if a relationship breaks down?
- A breakdown in your relationship can affect every part of your
life, including your finances. You might find yourself supporting
your children with little or no help from your ex-partner, or stuck
with joint debts your ex-partner is unwilling or unable to help you
- If you signed a loan contract as a co-borrower
or guarantor (or you were a director of a family company or partner
in a business), you might be liable for your ex-partner's
- In most cases, you won't be able to get out of loan contracts
you made in the past, but you should get legal advice about where
- Visit www.naclc.org.au to
find a community legal centre, consult one of the state Legal Aid
offices listed at www.nationallegalaid.org/, or look
in the front section of your telephone directory for legal
- For information about family relationship support
services, go to the Family Relationship Services Australia
What should you do if your relationship breaks down?
- If possible, discuss with your ex-partner who will take
responsibility for paying each debt. Make sure you receive copies
of account statements (or monitor the accounts
online or by phone) to check that debts are being paid as
- Make sure all jointly accessed savings accounts are changed to
two to sign.
- Make sure all redraw facilities and loan offset accounts are
frozen and cannot be accessed without your consent
- If your credit card has an additional cardholder,
cancel the additional card.
- Cancel any utility accounts (for gas, phone
and electricity) in your name that you no longer need. Your
ex-partner can then get them reconnected in his or her own
When should you get legal advice?
- If your ex-partner won't continue to repay joint
debts (or their share). [In this case, you may need to
contact your credit provider to seek a hardship variation (see step
5 on page 6). Remember: you are liable for the whole debt, not just
- If you think you might not owe a debt.
- If you need to negotiate a property settlement
(which may include debt).
Help with gambling problems
Even if your relationships are okay, a problem like gambling
addiction can affect everyone in the family, especially if you have
to sell something (a car or even your home) to pay off the debts.
For help with gambling problems, call one of the following
free national helplines (available 24 hours a
Six steps to smarter borrowing
Step 1. Work out if you can afford to
- Remember, if the borrower cannot or will not pay the loan, you
will be responsible for paying it all back. So you need to take the
same care as if you were taking out a loan for yourself. Always
seek legal advice before entering into a
Step 2. Shop around for the best deal
- If you do decide to guarantee a loan, take time to check and
compare interest rates, product features, and fees and charges.
Even a small difference in the interest rate can make a big
difference to what you will be liable for.
- Shop around online to compare products.
- Research published by the independent consumer group CHOICE can
also help you find the right product for your needs and budget -
Know who and what you're dealing with
- Anyone who wants to engage in credit activities (including
brokers) must be licensed with ASIC or be an authorised
representative of someone who is licensed. If they aren't, they are
- There is currently an exemption from licensing for credit
assistance provided through some businesses (for example, retail
stores and car yards). While the store may be exempt, the actual
credit provider must still be licensed. If you are unsure who the
credit provider is, ask the person you are dealing with to point
out the name in your credit contract.
- To find out if a credit provider is licensed or
call ASIC's Infoline on 1300 300 630.
- Anyone engaging in credit activities (for example, by providing
credit or assistance to you) must give you either a credit
guide (with information such as their licence number, fees
and details of your right to complain) or a written notice with
details of your right to complain about their activities.
Step 4. Keep up with your repayments
- Ensure the borrower can keep their repayments
up-to-date. How do they intend to repay the loan? Do they
have a regular source of income?
- As a guarantor or co-borrower, you have a right to ask the
credit provider for statements.
Get help if you can't pay your debts
- Make sure the borrower acts quickly if they're
having trouble making repayments. It may be difficult to face the
problem, but ignoring it will only make things worse.
- If they can't make the full repayment, they should pay what
they can, and contact their loan provider without delay.
- Anyone experiencing financial difficulties has the right to
apply to their credit provider for a hardship
variation. If the credit provider refuses, they can
complain to its independent dispute resolution scheme for a
variation on the grounds of hardship (see step 6 below).
- There are places you can go to for help - visit
www.moneysmart.gov.au for sample letters and information about
support services such as financial counselling and legal
assistance, call the National Debt Helpline on 1800 007 007 or call
ASIC's Infoline on 1300 300 630.
- See our factsheet Can't pay your
Step 6. Complain if things go wrong
- Try to resolve your problem with your credit provider
- If you aren't satisfied, take your complaint to your provider's
independent dispute resolution
scheme, the Australian
Financial Complaints Authority (AFCA). You can call
them on 1800 931 678.
- If you think that a credit provider has acted unlawfully or in
a misleading way, you can complain to ASIC online at www.asic.gov.au or call ASIC's
Infoline on 1300 300 630.
ASIC Infoline: 1300 300 630
Please note that this is a summary giving you basic information
about a particular topic. It does not cover the whole of the
relevant law regarding that topic, and it is not a substitute for
© Australian Securities and Investments Commission 2011
Last updated: 12 Nov 2018