A guarantor repays someone's debts if they don't pay. It's risky, so know your rights.
Think carefully before agreeing to guarantee someone's loan:
- If they stop making payments, it can cost you a lot of money.
- You will have to deal with their lender and/or debt collector.
- Your home, car or other assets could be repossessed if you can't pay.
Know how much you are promising to repay. It might be one loan, or all the borrower's debts with that lender (called an all-obligation guarantee — check the small print for these words).
Responsible lending rules protect guarantors as well as borrowers. Examples include checking you can afford repayments, providing clear information, and giving you enough time to pay.
Lender responsibility principles
A guarantor promises to act as a back-up for someone signing a credit contract, eg mortgage, car loan, credit sale (also called hire purchase).
If that person stops paying — or breaks any other rules of their credit contract — the lender has the right to:
- chase the guarantor for money owed, including fees and interest
- get the guarantor to put right any other broken rules, eg buying car rego or insurance.
Lenders might ask for a guarantor if someone has:
- no credit history
- bad credit or no credit score
- no, or few, assets to repossess if they stop paying.
Parents, other relatives, friends or business partners might be asked to be guarantors. It's different to being a co-borrower, who helps make regular payments. A guarantor is the lender's last resort if a borrower fails to pay.
How to protect yourself as a guarantor(external link) — Citizens Advice Bureau
How to prepare
If you are asked to be a guarantor:
- Check the terms and conditions. Are you comfortable with what you might have to do?
- Get independent legal advice, eg from a Community Law Centre.
- Make sure the lender does an affordability test on you, as well as on the borrower.
- Avoid using assets worth more than the amount owed as security, eg your home or car. These can be repossessed and sold if payments fall too far behind.
What common contract terms mean
Check if it's an "all obligations" guarantee. This means you promise to cover all the borrower's debts with the lender, now and in the future. Examples include:
- guarantee someone's mortgage, but also their credit card
- guarantee their car loan, but also their overdraft
- guarantee a personal loan, and any future loans.
If the borrower asks for a top-up or takes out new debt, the lender must again check both borrower and guarantor can afford all repayments.
Ask for the guarantee be limited to just that loan, or up to a cap (maximum amount). Have a figure in mind you could afford to repay. The lender may or may not agree.
You can ask the lender to cancel your all-obligations guarantee. If the lender agrees, you must still guarantee the original loan, but not future debts.
Example — Bank of Mum and Dad
Joe applies for vehicle finance, guaranteed by his parents Mike and Betty. Nine months later, Joe stops paying. The lender demands Mike and Betty pay Joe's car loan and a personal loan they didn't know about. Mike tries to complain, but the lender says it's an "all obligations" guarantee covering all Joe's debts. Betty complains to the lender's dispute resolution scheme.
The scheme finds the lender failed to tell Mike and Betty about the personal loan — nor did it check they could afford to guarantee this new debt. The scheme orders the lender to cancel the guarantee. This means Mike and Betty must still repay the car loan, but not Joe's personal loan.
Extra steps to protect yourself
These can be done if you are already a guarantor, or before you sign up.
The person asking you to be a guarantor is likely to be a family member or friend. For example, parents might guarantee a mortgage for their adult child.
It's a good idea to get a written agreement with the person asking you to be a guarantor. This document could:
- require them to share information about their finances, eg bank balance, rent rise, job loss
- set out who is responsible if something changes, eg if they move overseas or can no longer afford repayments.
Think about alternatives to a credit contract so you don't have to be a guarantor. One option is to extend your mortgage — if this is a realistic option — and lend the money to your loved one. Get help to draw up a loan agreement setting out how they will pay you back.
To create an agreement, you can buy a template online. Make sure you both understand it and sign it. Citizens Advice Bureau suggests these template options:
Personal loan agreements(external link) — Legal Documents New Zealand
Loan agreements(external link) — Law Live
If things go wrong
If you are having problems, eg unfair terms or a pushy debt collector, follow these steps — you might not need to do all three:
- Contact the lender or debt collection agency: Talk to them as soon as possible. Many issues can be solved at this step.
- Contact the lender's dispute resolution scheme: If you and the lender can't agree, get independent help to solve the problem.
- Report the lender to the Commerce Commission: This government agency gathers information to take action against lenders who break the rules. It doesn't take on individual cases.
1. Contact the lender
If the lender has acted unfairly, you might be able to change or cancel your guarantee. Before you make contact, read our information on:
- your rights
- how to complain.
A free financial mentor can help you contact the lender, or talk to the lender for you. Start by contacting the free helpline MoneyTalks.
Contact information(external link) — MoneyTalks
- Check your credit contract — this should list all fees, and explain when you might have to pay these costs.
- Gather proof, eg if fee amount is more than what's listed in your contract or on their website, differences between your lender's fees and most others.
- Think about what you will say, making notes with points you want to cover.
- Decide your ideal outcome, egreduce or cancel the fee.
During the conversation:
- Take notes — include dates and what was said. If you need to take your complaint to the dispute resolution scheme, this will be helpful proof.
- Stick to the facts — explain the problem and share any proof.
- Say what you want — explain your ideal outcome.
- Take time out — if it gets heated, or you want to think about their response, arrange a time to call or email back. Explain you need time to digest the conversation.
- Make it official — if you reach an agreement to reduce or waive (cancel) a fee, get it in writing. It's a good idea to get your contract updated.
Before you agree to be a guarantor, the lender must:
- help you understand what it means to be a guarantor
- check you can afford to take over the repayments without substantial hardship — explained in the Responsible Lending Code as able to make repayments and pay your other bills
- give you clear and understandable information about the credit contract, eg repayments, fees, repossession rules
- give you copies of important documents
- not force you — or let anyone else force you — to be a guarantor.
When you are a guarantor, the lender must:
- treat you fairly at all times, eg clear communication, reasonable fees
- update you if something changes, eg loan top-ups, repossession notices
- update you within strict timelines, eg within 5 working days if the borrower increases the loan amount.
For detail on timelines, see the Commerce Commission website:
Being a guarantor(external link) — Commerce Commission
Your rights are protected by these laws:
- Credit Contracts and Consumer Finance Act (CCCFA) — covers responsible lending requirements to treat borrowers fairly, share key information (also called disclosure), repossession rules, and more. The Responsible Lending Code is a guide for lenders on how to act in line with CCCFA.
- Fair Trading Act — lenders must not mislead or lie to you, including in adverts or in contract terms (rules of the document you signed).
- Consumer Guarantees Act — lenders must not provide sub-standard services.
Credit Contracts and Consumer Finance Act
The CCCFA changed in June 2015. If the contract you guaranteed started before then, different rules might apply. Ask a free financial mentor for help.
2. Contact lender's dispute resolution scheme
All banks, lenders and financial advisers must belong to a financial dispute resolution scheme. This independent body can:
- give you information about how lenders should act
- share tips on how to complain to your lender
- look into certain complaints when you and your lender cannot agree on a solution.
It's free for you talk to them and make a complaint. Or a free financial mentor can do this for you. Start by contacting the MoneyTalks helpline.
Free confidential advice(external link) — MoneyTalks
There are four financial dispute resolution schemes. To find out which your lender belongs to, you can either:
- Ask your lender.
- Phone any one of the four schemes to find out. For contact details, see:
Financial dispute resolution schemes
You can also check the lender's entry on the Financial Service Providers Register:
Search the register(external link) — Financial Service Providers Register
If the dispute scheme investigates your complaint, it might:
- Reduce how much you owe: Fees or default interest might be deducted, especially if the lender let these build up before taking action.
- Cancel your guarantee: You may be released from some or all of your responsibilities as guarantor.
Case study(external link) — Financial Services Complaints Ltd
Example — Too much interest
Anika guarantees her sister's mortgage. One day, she gets a letter from the lender. Payments are nine months behind and Anika must repay what's owed. It's a lot — all the missed payments, plus default interest and fees. Anika asks to pay it off over time, but the lender refuses. Anika then contacts the lender's dispute resolution scheme, complaining the amount seems very high.
The scheme finds the lender took too long to seek repayment, instead letting interest and fees stack up. The amount Anika must pay is reduced. The lender also agrees to a different repayment schedule.
3. Report the lender
The Commerce Commission enforces certain consumer laws, including the Credit Contracts and Consumer Finance Act. This is designed to make sure businesses lend responsibly, eg to check loans are affordable and disclose all interest and fees.
Commerce Commission doesn't act on behalf of individuals and can't investigate every complaint. But their investigations do help make sure businesses comply with the law. Your information helps them assess which consumer issues cause greatest harm.
Make a complaint(external link) — Commerce Commission
Get support at any point from:
- Community Law Centre: Free one-on-one legal advice for people with limited finances. The organisation has 24 centres throughout the country. You can find legal information and other resources on its website.
Our law centres(external link) — Community Law Centres
- MoneyTalks: This helpline gives free budgeting advice to individuals, family and whānau. Financial mentors can help you understand your financial situation, organise your debt and plan for the future. They can also put you in touch with a local budgeting service and help with issues you're having with lenders. Phone 0800 345 123, or use live chat, email or text, if you prefer.
Contact information(external link) — MoneyTalks