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Going guarantor: the good, the bad and the ugly
May 26, 2011
The car loan market is hotting up thanks to a spate of new affordable models entering the Australian market, but most young buyers still need a hand from mum and dad to get them over the line. Some parents help with the deposit and many are guarantors for their children's loans.
Acting as a guarantor on a car loan may seem like a harmless gesture of goodwill. But should the main borrower fall behind on repayments, you may be left to foot a hefty bill. That's because when you co-sign a loan you're legally agreeing to be responsible for the payment of another person's debts.
So before you sign on the dotted line it's vital to understand your rights and responsibilities as guarantor. Ensure your guarantee is limited to a set amount and a specific time period and seek independent legal and financial advice before proceeding.
Checklist for a future guarantor
Think carefully before you agree to act as a guarantor and ask yourself whether you really could afford to meet repayments should you need to. It's not uncommon for the co-signer to lose money, or even their home, over a guarantee that has not worked out to plan.
Before signing the dotted line you should find out:
- How much will you be required to repay?
- How will this repayment impact your ability to service your existing financial commitments?
- Is the borrower likely to default?
- How secure is the borrower's current income?
- Will your relationship be affected if the situation sours?
If you're not satisfied with the answers to these questions, all is not lost. There are alternatives to going guarantor and still helping your child into their first car. One popular option is to give the borrower an interest-free loan of a few thousand dollars, which they could use as a deposit.
Others prefer to help their children start a savings plan by matching their savings dollar for dollar.
The upside to borrowing with backing
While there are dangers involved with co-signing for a relative or friend, the upside for the borrower is that they have added obligation to meet repayments and clear debt. Having this added security may also attract lower interest rates, because the borrower is less risky in the mind of the lender.
It pays to compare car loans online at sites such as RateCity to ensure you're getting the lowest rate of interest. But also because online comparison sites list all of the features, fees and terms and conditions attached to the loan.
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