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    6 important things to know before becoming a Guarantor

    2/08/16 5:36 PM

    Most of us will be asked to be a guarantor at some point during our lives. Whether it is a loan taken out for business purposes, or for a family member who is seeking to borrow money for the purchase of their first property. As a guarantor, you will be called on to pay the outstanding loan or debt if the person responsible is unable to do so. Despite the prevalence of guarantees, most people are not aware of their rights and obligations.

    Here are 6 things you should know prior to becoming a guarantor in relation to a loan:

    1. A creditor (usually a bank or financial institution) can sue the guarantor as soon as the borrower defaults under the loan agreement. A 'default' is not limited to non-payment, but can include any action that breaches the terms of the loan agreement. This means that if the borrower fails to honour one or more conditions under the loan agreement, a guarantor may be immediately exposed to being called on for repayment of the loan.

    2. If you are a guarantor and have been called to act upon a default, then you usually have a right to sue the borrower subject to the loan agreement. However, guarantors may choose not to bring a claim against the person who cannot pay back their debt, often because they are a relative or close friend. It is also worth keeping in mind that should the borrower default on their loan it is possible that they may not have the assets to completely the claim.

    3. Prior to signing a loan agreement as a guarantor, you may be able to limit your liability as a guarantor. If you wish to do so, it is imperative that the limit of your liability is properly documented before signing.

    4. Prior to signing a loan agreement as a guarantor, you should be aware of the capacity in which you are signing the guarantee (for example, John can sign as a Director of Not-a-Real-Company Pty Ltd, or he can sign in his own personal capacity). This is especially important if you are a company director, or trustee of a trust.

    5. Courts will generally hold a guarantor responsible for a debt, except in limited circumstances. Examples include unconscionability, special disadvantage and undue influence.

    6. If you, as the guarantor, cannot pay back the money owed by the debtor, the lender can personally pursue you for payment. This often means that they could sell your assets to pay for the debt owed, interest accrued, and other costs, including any legal fees.

    If you are considering becoming a guarantor for an individual or company, or you are being held liable for repayment of a loan as a guarantor, our experienced lawyers at Frank Legal can ensure that you understand your rights and responsibilities and are well-positioned to protect them.

    If you have further questions, please contact us at

    This is not legal advice. 

    Robert Webb

    Written by Robert Webb