Sometimes a lender will require a guarantee that a debt will be paid back by someone else if the borrower stops repaying the loan. A guarantor is someone who agrees to do this.
If you are considering being a guarantor for a loan, make sure you understand what you are agreeing to, before signing up. You will be responsible for paying back the loan if the borrower cannot.
I've agreed to guarantee a loan – what must the lender tell me before I sign?
The lender must provide you with key information about the loan and all the terms of the guarantee before you sign up. The terms of the guarantee must be clear and concise.
The lender must take steps to make sure you are reasonably aware of what you are committing to before you sign the guarantee. This might include whether you are guaranteeing one loan or all loans made by the lender to the borrower and what it means for you if the borrower doesn't pay.
The lender must also make enquiries to check whether you are likely to be able to make the loan payments without suffering substantial hardship. You'll have to think about whether you are prepared to sell any assets if you can't afford to take over the loan payments.
A lender may have to give you more information during the term of the loan in:
The lender and the borrower enter into another loan to which the guarantee applies. In this case, the lender must give you the same initial disclosure as the borrower.
The loan is changed in a way that increases the borrower’s obligations (and consequently yours) or gives the borrower less time to make any payment due under the contract – read more about variation disclosure.
You ask for information (this is known as request disclosure). There are some exceptions to when a lender has to provide request disclosure – read more about request disclosure
When does the lender have to give me this information?
A lender must provide you with key information about the loan and all the terms of the guarantee before you sign the guarantee. If the borrower and lender later enter into another loan agreement that is covered by the guarantee, the lender must provide you with key information about that loan within 5 working days of the date it is entered into.
If the borrower and lender agree to make changes to the contract that increase the borrowers' obligations (and consequently yours) or if the lender exercises a power under the contract that increases the borrowers' obligation - the lender must provide you with information about that change within 5 working days.
If you ask for information about loans that are subject to the guarantee, the lender must provide you with that information within 15 working days.
How should the lender give me this information?
A lender must make guarantee disclosure in writing, either in a single document or in a series of related documents. The information must be clear and concise so that a reasonable person will see it. The overall effect must not be misleading or deceptive.
A lender must provide guarantee disclosure by either:
giving a disclosure statement to you in person
posting a disclosure statement to the your last known address, or
emailing or faxing a disclosure statement to you (as long as you have agreed to this).
When a lender increases the interest rate, fees or charges a borrower may have to pay under a contract, and this is allowed under the contract, then instead of disclosing in one of the ways set out above, the lender can disclose by:
displaying information about the changes prominently at their place of business
advertising the changes at least once in all the following areas in which they do business: Whangarei, Auckland, Hamilton, Rotorua, Hawkes Bay, New Plymouth, Palmerston North, Wellington, Nelson, Christchurch, Dunedin and Invercargill, and
posting information about the changes on their website (if they have one).
A lender can’t use this method of disclosure, however, if the change in any way affects the repayment amount, frequency, time for payment or how any payment is calculated under the contract.
Lenders must comply with the lender responsibility principles
The lender must act carefully, diligently and with the skill of a responsible lender at all times, and treat borrowers and guarantors reasonably and with respect.