26 May Guaranteeing a loan | Debt – shared by our Auckland lawyers
Article sourced for you by Auckland law firm Quay Law. To contact your lawyer in Auckland.
Think before taking on another’s debt
Source: Business Day
Being asked to guarantee a loan is like being asked to test out a guillotine.
Everything’s fine while the blade’s safely suspended in the air. But if it starts falling, your neck’s on the line.
That’s iLender chief executive Jeff Royle’s explanation of what it means to act as guarantor.
With more than 20 years in the mortgage broking business, he’s seen too many heads roll when it all goes wrong.
You might want to help out a mate or a family member but guaranteeing someone’s loan is a huge commitment. If the borrower defaults for any reason, the debt falls squarely upon your shoulders.
The usual purpose of a guarantee is to get a mortgage or other loan across the line.
Royle tells a classic horror story about a couple who guaranteed their son’s first home loan a few years back, secured against their own property.
The darling boy turned out to be a delinquent druggie, his mates wrecked the place, and his house had to be sold with money owing.
“Of course, the bank then knocked on mum and dad’s door, saying you acted as guarantor, we want $60,000,” says Royle. “And the bank sold them up.”
He says these days, the banks are becoming a bit wary about accepting guaranteed loans – which is probably a good thing.
But if you’re determined to give your offspring a leg up the property ladder, you need to think very carefully about how you do it.
TALK IT THROUGH
“There’s a real problem about financial abuse in this country,” says Age Concern chief executive Ann Martin.
Older people are sometimes pressured into lending family members their credit card, sharing their pension – or signing a loan guarantee.
In theory, it’s just a bit of paperwork to reassure the bank. In reality, guarantors can be left destitute when the family home is sold from beneath them.
If there’s any element of emotional blackmail involved, it can be a pretty ugly situation.
Age Concern has social workers available who can provide support for making the tough calls.
“It could be just having somebody there that gives you the strength to say ‘actually, perhaps you should look somewhere else’,” says Martin.
But you also need to see a lawyer, she says.
LIMIT YOUR LIABILITY
Most lawyers worth their salt advise against guaranteeing a loan, and spell out just how dangerous it can be.
If you do choose to go ahead, they can help you lower your risk.
A lawyer explains that every guarantee document is different, so getting specific legal advice is essential.
There are many examples such as a clients who wanted mum and dad to guarantee only their deposit. The bank “tried to pull a swifty” and make it an unlimited guarantee, but after a bit of a dust-up they reached an agreement.
You may be able to get a limited guarantee so that you’re only liable for a specific sum, plus interest, rather than the total amount borrowed.
“That is the type that I often encourage people to bargain for, if they’ve got the negotiating strength to do so with the bank.”
The Citizen’s Advice Bureau can help you find a lawyer, or you can contact your community law centre.
ASK HARD QUESTIONS
If someone’s asking you to guarantee their loan, it means the lender doesn’t think they’re a safe enough bet on their own.
They might not have a big enough deposit or a great track record with savings, or maybe there are some skeletons lurking in their credit history.
So you better find out why they’re coming to you.
Financial author Sylvia Bowden used to see it all the time when she worked as a budget advisor in Rotorua and Tauranga.
“People need to wise up a bit and instead of listening to people’s sob stories, they need to think well hang on, there must be a reason for that.”
It’s not just mum and dads helping out their kids, either.
Often couples go guarantor or take out a loan in their name because their partner has a poor credit rating.
“They think the relationship’s forever, and then sometimes the boyfriend or girlfriend moves out and says see you later alligator, and they’re stuck with paying off the loan,” says Bowden.
“That’s a real trap – and I’ve seen that a lot.”
She reckons guaranteeing a loan for something that will actually lose value – like a car or a stereo – is just plain silly.
Apart from anything else, it sets a bad example.
“It’s teaching your children to borrow for things, instead of save up or just make do with what they’ve got.”
Think ahead If you’re not careful you can really lose control over the debt you’re backing.
Mr Q guaranteed a loan for a company of which he was a director. When he later resigned from the role, he assumed he’d ditched the responsibility along with the job.
The company got into strife and the bank came knocking at his door to get the money it was owed.
Mr Q wasn’t even allowed information about how the company had folded, despite being made to cough up for its debts.
The bank offered to reduce the amount it needed to discharge the guarantee, but Mr Q was convinced he shouldn’t be responsible.
The case went to the Banking Ombudsman, who ruled against Mr Q and recommended he accept the offer.
GET OFF THE HOOK
How long your neck’s on the line depends on the agreement you’ve signed.
In some instances banks agree to cancel guarantees, but they’ve required a two-year window where you’re still liable.
If your bank won’t play ball, Royle suggests refinancing the mortgage once your offspring/cousin/partner has built up enough equity to stand on their own two feet.
The new lender hopefully won’t require a guarantee, meaning it will die with the old mortgage.
Otherwise you may have a shot of getting out of it if the lender didn’t explain it properly and provide all the documents, or if the agreement is oppressive. Again, you’d need legal advice.
Consider alternatives Royle says he would never guarantee a loan, even for his own flesh-and-blood.
“It’s too risky,” he says.
“We all like to try and help the kids, but we just have to be aware of what we’re doing, and what impact it could have if it goes wrong.”
But Royle’s no miser – he thinks gifting some cash is often a much better way of helping out.
“It’s my money – if I want to put up $10,000 or $20,000 or whatever the sum, that’s fine, because it can’t come back and bite me on the backside.”
Your cherished ‘Dad of the Year!’ coffee mug won’t look so good when it’s relocated to the shelf of a scungy one-bedroom council flat.
If the guillotine blade falls, you risk severing your own financial freedom.
Whatever you do – don’t lose your head.
– © Fairfax NZ News