How to decide if you should give a guarantee in New Zealand

Introduction

Often a lender may ask the borrower to provide a guarantor as a means of obtaining additional security for a loan. In many situations it can be very hard to say no - for example, when the borrower is a family member. But before entering into the guarantee you need to be clear about the obligation you have undertaken.

What does it mean to be a guarantor?

In simple terms becoming a guarantor means you are responsible for the borrower's debt. As security for the debt, you may have to give a mortgage over your property.

The main difficulty is that you may have no direct control over whether the borrower makes the repayments for the loan. Sometimes you may not know about any repayment problems until too late. If the borrower has defaulted under the loan (usually by failing to make repayments) the bank is not required to sue the borrower first – it can call on you, the guarantor, and if need be require you to sell your property.

What if there are other guarantors?

Even if there are several guarantors the bank does not have to proceed against all of them. It can instead decide to proceed against the one who is most likely to pay or the one who has the house that is easiest to sell. If this is you, it is then up to you to attempt to get the other guarantor or guarantors to pay their proportion.

Guarantee must be in writing

To be enforceable against you, a guarantee of another person's debt must be in writing and must be signed by you.

"Disclosure" by creditors to guarantors

A creditor is required to give any guarantor a copy of both the guarantee and the credit contract, either before the guarantee is given or not later than 15 working days after that.

As guarantor you must also be informed, within 15 working days, if the creditor lends the debtor any more money to which your guarantee applies.

What else can I do to protect myself as a guarantor?

It is crucial that you seek legal advice and enter into a legal agreement that:

• requires full disclosure to you of the borrower's business accounts
• requires you to be informed of the way in which the borrower's business decisions are made
• provides for a limit on the amount you guarantee
• states the way in which liability for the loan is to be shared

Cautionary notes

• The decision to become a guarantor can have drastic results if you are unaware of the full extent of your liability, which is determined by the terms of the contract of guarantee. You should obtain legal advice before signing the contract.