The information in this section may only apply to contracts or agreements entered into before 1 April 2005. If you entered into a guarantor contract or agreement on or after 1 April 2005 see our Credit guide.

A guarantor is someone who agrees to repay a loan or hire purchase (or other debt) if the borrower cannot pay. If you guarantee someone else's debt you are agreeing to repay the debt if the borrower doesn't. You are NOT witnessing a document to say that they are of good character, or to 'do them a favour'.

A guarantee is a written contract between the lender and the guarantor. The guarantor signs a guarantee which is usually part of the borrower's credit contract (agreement).

Anyone over 18 can be a guarantor. Usually, a guarantor must have a steady income before they will be acceptable. Some loan companies don't check whether the guarantor can afford to pay the debt. The guarantor will have to pay even if they can't afford to.

Lenders can ask for a guarantor before they lend you money if:

you do not meet the finance company's lending criteria - eg, your income is not within the finance company's requirements or
there is a risk you won't repay the loan - eg, if you have a history of not paying debts, or if the loan is high in relation to your income.

"Secured" guarantees

If you sign a secured guarantee you will be asked to list some of your property as security. This means that if the borrower doesn't pay their debt, and you cannot pay either, then the lender can take the property you listed and sell it to repay the debt.

Don't list as security anything (eg, your house) larger than the debt owing. If you have listed your house as security and you are not able to repay the debt, seek legal advice immediately. The lender may take legal steps to sell your house.

Don't list any item as security that:

doesn't belong to you
is on hire purchase
is already listed as security for a loan or another guarantee.

Guarantor's right to copy of contract

If you are a guarantor for a person entering into a loan or interest-bearing hire purchase contract, the lender must give you a copy of:

the guarantee which will outline your obligations, and
the loan or credit agreement to which the guarantee applies.

This rule does not apply to interest free hire purchase contracts where only the cash price is paid.

If the borrower defaults

If you guaranteed a secured loan or a hire purchase the finance company must send to you the same notice of pre-possession (a notice that sets out that the borrower is in default) that the debtor is sent.

This will give you information about how much the borrower has fallen behind in payments. This notice does not have to be sent if the goods were repossessed because the borrower had used them in a way they were not entitled to eg, sold, tried to hide, or destroyed the goods.

Goods cannot be repossessed from you unless you signed a secured guarantee.

Repaying if the borrower defaults

How much you will be required to repay to the lender will depends on what is in the contract. If the contract says the amount borrowed is a fixed amount then it cannot be changed. That is the amount you are guaranteeing.

However, if the contract allows the borrower to borrow more money at a later date, you are the guarantor for the total amount borrowed.

eg, you guarantee a credit card with a limit of $1,000. The credit card user spends $1,000 with their credit card but doesn't pay anything off it. By the time you are asked to pay as the guarantor, you find you must pay $1,500. That's because interest has been added each month.

To avoid this happening you can say that you will only guarantee payment up to a certain amount. Make sure this limit is written into the contract.

If you haven't signed any guarantee papers you don't have to pay any money.

Guarantor unable to pay debt

If you are the guarantor and can't pay the debt, the lender can take you to court. The court can order you to pay the money:

in regular payments
in a lump sum, or
by directing a deduction from your wages, benefit or other money owed to you.

If you guaranteed a large debt, a lender may apply to make you bankrupt to get the money from you.

Recovering money from the borrower

If you pay the debt as the guarantor, you could claim the money back from the borrower at the Disputes Tribunal or the District Court. It will probably be difficult to get your money back from someone who couldn't pay their debt in the first place.

Misleading information about borrower's ability to pay

Under the Fair Trading Act, lenders must not mislead or deceive you about the borrower's ability to repay their debt. You can go to the Disputes Tribunal or District Court if you guaranteed a loan because you were led to believe by the lender that the borrower could afford to pay the loan.

Lender requests more than the amount guaranteed

Under the Fair Trading Act, the lender must not mislead or deceive you about the total amount you will have to pay, or what you must do if the borrower doesn't pay.

If the lender gives further loans to the borrower which you don't know about, you will not be responsible for paying the extra loans unless you agreed to this when you signed the guarantee.

Unfair guarantee

If you signed a guarantee contract which was unfair you can ask a Disputes Tribunal or District Court to decide if the contract was 'harsh or oppressive'. They can look at:

the terms of the guarantee
how the lender used their powers under the guarantee
whether you were pressured to sign the guarantee
whether you were taken advantage of - eg, your lack of English meant you could not be expected to understand that you were agreeing to repay the loan if the borrower couldn't.

The Tribunal or Court can order that the guarantor:

does not have to pay so much, or
does not have to pay anything.

Checklist

If you are asked to guarantee a loan:

Check that the contract:

tells you the situations in which you will have to repay the loan
says how long you must act as guarantor
does not allow the amount borrowed to be increased without you being told about it
tells you the amount you are guaranteeing, when that amount is known.

Ask:

why does the borrower have to name a guarantor? Are they seen as a bad risk?
does the borrower have any other means of paying if they lose their income?

Think:

how mature and responsible is the borrower?
is the borrower being realistic about how much they can afford to repay?
am I prepared to repay the loan?

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