What is a guarantor, and what are the risks of being one?

What is a guarantor?

A guarantor is someone who agrees to cover another person’s loan if that person cannot. Moneysmart explains that a lender may ask for a guarantor when it will not lend to the borrower alone. Guarantors are often family members, such as parents helping a child into a first home, but they can also be business partners or company directors supporting a business loan.

The guarantee is a legal commitment, not a character reference. Moneysmart’s own advice is to treat it as if you were taking out the loan yourself.

Why do lenders ask for a guarantor?

Lenders look for extra comfort when a borrower’s own position is thin. Typical triggers include:

• A small deposit or limited savings.
• A short work history or new business.
• Income that is hard to document.
• Credit history that makes the lender cautious.
• A company or trust borrower where the lender wants personal backing from the directors or principals.

A guarantor adds a second source of repayment, and sometimes extra security if their property is offered. Our pages on guarantor home loans and guarantor and family guarantee loans explain the common structures.

What are the risks for the guarantor?

Moneysmart lists them clearly:

• You may have to repay the whole debt, plus interest.
• If you cannot pay, the lender may repossess security such as your home or car.
• Guaranteeing a loan can make it harder to get your own loans later.
• A default may be recorded on your credit report.
• Non-repayment can strain your relationship with the borrower.
• A guarantee can have financial, legal and other consequences, including tax.

Notice that the exposure is not limited to a fixed share unless the guarantee says so. A lender can generally pursue the guarantor for the full amount owed, subject to the terms.

What is a limited guarantee?

A limited guarantee caps what the guarantor can be asked to pay. It may be a set sum or a portion of the loan. Moneysmart says this may limit what you owe but that you could still lose the asset used as security. Ask the lender to confirm in writing:

1. The exact amount covered.
2. Whether that amount can reduce over time.
3. When the guarantee ends.

Be especially careful with loans that have no clear end date, such as overdrafts or lines of credit, because the guarantee may keep applying for as long as the facility exists.

What about guarantees on business loans?

They can carry more risk. Moneysmart warns that for business loans the risk can be higher and that responsible lending obligations do not apply in the same way as for consumer loans. Directors are often asked to guarantee a company’s borrowing personally, which means their own assets, including the family home, can be exposed if the business struggles. If you are a director, read our pages on small business loans and company and trust borrowing, and talk to your accountant and solicitor.

What should a guarantor ask before signing?

• How much could I be liable for in the worst case?
• Is this guarantee limited, and if so, how?
• What security, if any, am I giving?
• How will I be told if repayments are missed?
• Can I be released, and under what conditions?
• What happens if the borrower refinances or increases the loan?
• Have I had independent legal advice?
• Can I afford it if I had to pay?

Moneysmart suggests getting legal or financial advice before signing, noting free options such as financial counselling and free legal advice. It also explains that a guarantee may be open to challenge if you signed under pressure or threats, had a disability or mental illness, did not understand the risks or documents, or were misled by the lender or broker.

Can a guarantor be released?

Not automatically. Moneysmart does not set out a release process and notes that getting out can be hard if the borrower falls behind. Some loans allow release when the borrower’s balance falls or their position improves, and sometimes a refinance in the borrower’s own name removes the need. Ask about release terms before signing, not after something goes wrong.

What are the alternatives to a guarantor?

If asking a family member to take on this risk feels uncomfortable, there may be other routes:

• A larger deposit or more savings.
• Another form of security, such as extra equity.
• A different lender with a different policy.
• A specialist or private lender that focuses on the security more than a guarantor.
• Waiting while a work history or credit file builds.

Which is realistic depends on the borrower and the loan. Our first home buyer loans page shows how we approach hard cases, and the guide to LVR explains how deposit and equity affect options.

An illustrative example

This is an illustrative scenario with no real names.

A young buyer has steady income but a small deposit. A lender will approve the loan if a parent guarantees part of it, secured against the parent’s home. The parent asks for a limited guarantee, confirms the amount, asks when it will reduce and talks to a solicitor. Later, as the buyer pays the loan down and the property rises in value, they refinance in their own name and the guarantee ends.

If the buyer had missed repayments before then, the lender could have pursued the parent and, ultimately, the security. That is the trade-off every guarantor accepts.

What mistakes should I avoid?

• Signing because it feels rude to say no.
• Skipping independent advice.
• Not asking what happens if the loan increases.
• Giving an open-ended guarantee when a limited one was possible.
• Forgetting the effect on your own borrowing.
• Ignoring the relationship risk.

How does Ownright help?

We explain how a guarantee would work, help borrowers explore alternatives and, where a guarantee is the right route, point guarantors to independent advice before signing. Trevor Scott has seen enough family and business guarantees to know that the best ones are entered into with clear eyes. We work Australia-wide. If you are a borrower weighing up a guarantor, get in touch here and we will look at alternatives too.

Ready to look at your options?

Sounds like you are looking for a loan, with or without a guarantor, that suits everyone involved. We are the lending experts in guarantor and family-backed finance, so click the button and see if you qualify.