Puzzle Finance Blog

Guarantors asking for trouble

Going guarantor for a relative or a friend could put your most valuable asset on the line.

John and Nadia Abdelkodous, a couple from Casula in Sydney, borrowed $494,000 from Adelaide Bank in 2001 to help their son buy a house. Nine years later, they were in court fighting to stop a default order against them.

The couple offered their Casula home as security for the loan, which allowed their son Victor to buy a house in Prestons. The bank started default proceedings in 2005 and the parents took over the repayments until 2009, when they found themselves unable to continue to do so.

Last year, the bank obtained a default judgment and the parents sought to set it aside, claiming their son had forged their signatures. 

In February, the NSW Supreme Court set the default judgment aside and allowed the parents to file a defence of fraud.

Spate of cases

A spate of cases involving disputes over loan guarantees have been in court recently and many have features in common with the Abdelkodous case.

A guarantee is where you promise to repay the loan if the borrower does not. The lender will ask for a guarantee when it thinks the borrower might have difficulty repaying the loan. If the borrower does not make all the payments under the loan contract, the guarantor will have to pay back the outstanding amount plus interest and any fees and charges.

What recent cases show is that people who give guarantees are often older and lack financial understanding. Their home is often their only asset and they have limited income, so if the lender calls on them to honour their guarantee, they are almost certainly going to be in trouble.

Fraud, or the suggestion of fraud, is often a feature.

Should be banned

Matthew Bransgrove is a partner at Bransgrove Lawyers, which specialises in mortgage and finance litigation. He says he would not recommend anyone be a guarantor.

''From all the cases we have seen, it is hard not to conclude that they don't serve any useful purpose,'' he says. ''I think they should be banned, especially where the guarantee is used to support a business loan. If people are going into business, they should be able to put together a business plan that does not involve getting their parents to give them a guarantee.''

Bransgrove says there has been a trend in the courts during the past few years to set loans aside in cases where the judge felt the guarantor was a vulnerable person and the lender should have made more inquiries before accepting the guarantee.

''A lot of these arrangements are based purely on the value of the guarantor's asset,'' he says. ''The courts are saying that lenders have to do a bit more work than that. But the reality is that more often than not the court does not set the loan aside and the guarantor has to make up the payments for the defaulting borrower.''

Bransgrove says there are cases in which the guarantor has signed false statements, knowingly or not, or been involved in some other fraud to help the borrower. In those cases, the courts are not sympathetic: ''If you are seeking relief, you have to be blameless yourself.''

Other options

According to the Consumer Credit Legal Centre (NSW), many people report that they feel pressured into signing a guarantee and they do so unwillingly.

The principal solicitor, Katherine Lane, says to consider other options before committing to a guarantee.

''Perhaps you could give the borrower an interest-free loan of a few thousand dollars, which they could use as a deposit,'' she says. ''You could offer to help them start a savings plan by matching their savings.''

Loan guarantor case file

Fast Fix Loans v Mladenko Samardzic. The parents were on an age pension, of non-English speaking background, had received very little education and were manual labourers most of their lives.

The son ran a property development company and needed additional funding. He arranged for the parents to mortgage their unencumbered property as additional security.

The court found that the parents understood the commitment they were making and were prepared to take the risk because they trusted their son. However, the court ruled that the loan be set aside.

It was "improvident" because the lender was aware of the difficult financial position of the son's company at the time and was therefore aware of his limited ability to repay the loan. The lender didn't make inquiries as to the parents' ability to repay, either.

Source: Bransgroves Lawyers

What to do before going guarantor

❏ Check the borrower has a regular source of income that is sufficient to repay the loan.

❏ If you are planning to go guarantor for a business, ask for the most recent financial statement and get an independent opinion from an accountant.

❏ Look at your own finances and make sure you are able to make the repayments if something goes wrong with the borrower. Would you need to sell assets?

❏ Talk to the lender to make sure you know exactly how much it is that you are guaranteeing. Also, confirm that the lender cannot change the amount guaranteed without your consent.

❏ Make sure you get a copy of the loan contract, which should include the amount of the loan, the interest rate, the term and the amount of monthly loan repayments.

❏ Beware of guaranteeing loans that are not scheduled to be repaid. These include overdrafts and line-of-credit loans. In theory, guarantees on these types of loans can go on forever.

Source: Consumer Credit Legal Centre (NSW).

Posted by John Kavanagh - The Age on 30th March, 2011 | Comments | Trackbacks

Bookmark and Share

The trackback URL for this page is http://www.puzzlefinance.com.au/trackback?post=23616137


There are no trackbacks for this post


There are no comments for this post

Post a Comment

HTML is not allowed in comments, http://... will be automatically linked.

Name (required):

Email Address (not displayed):

Comment (required):

To help prevent spam, please enter the word fair here:

Puzzle Finance Blog

About Puzzle Finance


September 2017
August 2017
July 2017
June 2017
May 2017
March 2017
February 2017
January 2017
December 2016
November 2016
October 2016
July 2016
June 2016
May 2016
April 2016
March 2016
February 2016
January 2016
December 2015
November 2015
October 2015
September 2015
August 2015
July 2015
June 2015
May 2015
April 2015
March 2015
February 2015
January 2015
December 2014
November 2014
October 2014
September 2014
August 2014
July 2014
June 2014
May 2014
April 2014
March 2014
February 2014
January 2014
December 2013
November 2013
October 2013
September 2013
August 2013
July 2013
June 2013
May 2013
April 2013
March 2013
February 2013
January 2013
December 2012
November 2012
October 2012
September 2012
August 2012
July 2012
June 2012
May 2012
April 2012
March 2012
February 2012
January 2012
December 2011
November 2011
October 2011
September 2011
August 2011
July 2011
June 2011
May 2011
April 2011
March 2011
February 2011
January 2011
December 2010
November 2010
October 2010
September 2010


Purchase or Rent (1)
The Age (1)

Recent Puzzle Finance Blog Posts

8 Sep 17: Why property investors aren’t necessarily as rich as you think they are Investors have surged in the Sydney and Melbourne property markets at  record levels  over the past few years, with many amassing significant prope... [More...]
5 Sep 17: ‘Risks magnified’ when investors use equity loans to buy multiple properties A common strategy used by property investors around Australia to amass large portfolios of real estate is potentially very risky, experts warn. More th... [More...]
30 Aug 17: Investors can own multiple properties but still be eligible for first-home buyer benefits A little-known loophole across all states and territories is allowing investors, who already own multiple properties, to take advantage of governmen... [More...]
29 Aug 17: A homeowner's guide to letting on Airbnb More and more homeowners are looking for ways to increase their household income. This includes looking to their family home to provide extra funds through Ai... [More...]
27 Aug 17: Organise finance early this spring property season  With more properties soon to hit the market, lenders will be stretched and house hunters should organise finance well ahead of time, prop... [More...]
26 Aug 17: The obvious mistakes first home buyers make JUST say you won the Lotto or a kindly relative left you a sizeable inheritance and, hooray, you have a deposit for a bedsit in a far-flung corner of Sydney.... [More...]