Before You Agree to Guarantee a Family Loan

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Helping an adult child buy a car, secure a home loan, or get access to credit can feel like a straightforward favour. But becoming a guarantor is very different from simply offering encouragement or lending someone a hand with a deposit.

A guarantor agrees to repay a borrower’s debt if the borrower does not meet their obligations. In New Zealand, lenders can pursue a guarantor for money owed, including certain fees and interest. Depending on the agreement, the guarantee may cover more than the particular loan you had in mind.

That last point is particularly important. Some guarantees are described as all-obligations guarantees, which can potentially cover other debts the borrower has with the same lender. Before signing anything, find out exactly what you are guaranteeing and whether there is a maximum amount.

Think carefully about what would happen if you suddenly had to make the repayments yourself. Would it affect your retirement income, savings, or ability to meet your own household expenses? Consumer Protection recommends considering whether your home, car, or other assets are being offered as security, as these could potentially be at risk if you cannot meet the guarantee.

You also have protections. Lenders must assess whether a guarantor can afford the commitment without substantial hardship and provide information to help them understand what they are signing.

Still, do not rely on the lender to explain every consequence in a way that suits your circumstances. Consumer Protection recommends getting independent legal advice before agreeing to guarantee someone else’s debt.

Most importantly, do not let family pressure turn a financial decision into an emotional one. You can support someone without putting your own financial security on the line. If you are considering becoming a guarantor, take the contract away, understand the full commitment, and get advice before putting your signature on it.