A guarantor repays someone's debts if they don't pay. It's risky, so know your rights.
Think carefully before agreeing to guarantee someone's loan:
- If they stop making payments, it can cost you a lot of money.
- You will have to deal with their lender and/or debt collector.
- Your home, car or other assets could be repossessed if you can't pay.
Know how much you are promising to repay. It might be one loan, or all the borrower's debts with that lender (called an all-obligation guarantee — check the small print for these words).
Responsible lending rules protect guarantors as well as borrowers. Examples include checking you can afford repayments, providing clear information, and giving you enough time to pay.
Lender responsibility principles
What's involved
A guarantor promises to act as a back-up for someone signing a credit contract, such as mortgage, car loan, credit sale (also called hire purchase).
If that person stops paying — or breaks any other rules of their credit contract — the lender has the right to:
- chase the guarantor for money owed, including fees and interest
- get the guarantor to put right any other broken rules, for example, buying car registration or insurance.
Lenders might ask for a guarantor if someone has:
- no credit history
- bad credit or no credit score
- no, or few, assets to repossess if they stop paying.
Parents, other relatives, friends, or business partners might be asked to be guarantors. It's different to being a co-borrower, who helps make regular payments. A guarantor is the lender's last resort if a borrower fails to pay.
How to protect yourself as a guarantor(external link) — Citizens Advice Bureau
How to prepare
If you are asked to be a guarantor:
- Check the terms and conditions. Are you comfortable with what you might have to do?
- Get independent legal advice, such as from a Community Law Centre.
- Make sure the lender does an affordability test on you, as well as on the borrower.
- Avoid using assets worth more than the amount owed as security, such as your home or car. These can be repossessed and sold if payments fall too far behind.
What common contract terms mean
All-obligations guarantees
Check if it's an "all obligations" guarantee. This means you promise to cover all the borrower's debts with the lender, now and in the future. Examples include:
- guarantee someone's mortgage, but also their credit card
- guarantee their car loan, but also their overdraft
- guarantee a personal loan, and any future loans.
If the borrower asks for a top-up or takes out new debt, the lender must again check both borrower and guarantor can afford all repayments.
Ask for the guarantee be limited to just that loan, or up to a cap (maximum amount). Have a figure in mind you could afford to repay. The lender may or may not agree.
You can ask the lender to cancel your all-obligations guarantee. If the lender agrees, you must still guarantee the original loan, but not future debts.
Example — Bank of Mum and Dad
Joe applies for vehicle finance, guaranteed by his parents Mike and Betty. Nine months later, Joe stops paying. The lender demands Mike and Betty pay Joe's car loan and a personal loan they didn't know about. Mike tries to complain, but the lender says it's an "all obligations" guarantee covering all Joe's debts. Betty complains to the lender's dispute resolution scheme.
The scheme finds the lender failed to tell Mike and Betty about the personal loan — nor did it check they could afford to guarantee this new debt. The scheme orders the lender to cancel the guarantee. This means Mike and Betty must still repay the car loan, but not Joe's personal loan.
Extra steps to protect yourself
These can be done if you are already a guarantor, or before you sign up.
The person asking you to be a guarantor is likely to be a family member or friend. For example, parents might guarantee a mortgage for their adult child.
It's a good idea to get a written agreement with the person asking you to be a guarantor. This document could:
- require them to share information about their finances, such as bank balance, rent rise, or job loss
- set out who is responsible if something changes, for example, if they move overseas or can no longer afford repayments.
Think about alternatives to a credit contract so you don't have to be a guarantor. One option is to extend your mortgage — if this is a realistic option — and lend the money to your loved one. Get help to draw up a loan agreement setting out how they will pay you back.
To create an agreement, you can buy a template online. Make sure you both understand it and sign it. Citizens Advice Bureau suggests these template options:
Personal loan agreements(external link) — Legal Documents New Zealand
Loan agreements(external link) — Law Live
Example — Too much interest
Anika guarantees her sister's mortgage. One day, she gets a letter from the lender. Payments are nine months behind, and Anika must repay what's owed. It's a lot — all the missed payments, plus default interest and fees. Anika asks to pay it off over time, but the lender refuses. Anika then contacts the lender's dispute resolution scheme, complaining the amount seems very high.
The scheme finds the lender took too long to seek repayment, instead letting interest and fees stack up. The amount Anika must pay is reduced. The lender also agrees to a different repayment schedule.
Your rights as a guarantor
Before you agree to be a guarantor, the lender must:
- help you understand what it means to be a guarantor
- check you can afford to take over the repayments without substantial hardship — explained in the Responsible Lending Code as able to make repayments and pay your other bills
- give you clear and understandable information about the
- credit contract, such as repayments, fees, and repossession rules
- give you copies of important documents
- not force you — or let anyone else force you — to be a guarantor.
When you are a guarantor, the lender must:
- always treat you fairly, for example, clear communication, reasonable fees
- update you if something changes, for example, loan top-ups, repossession notices
- update you within strict timelines, such as within 5 working days if the borrower increases the loan amount.
For detail on timelines, see the Commerce Commission website:
Being a guarantor(external link) — Commerce Commission
If things go wrong
If you are having problems, such as unfair terms or a pushy debt collector, follow these steps to make a complaint.