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Q&A - Loan guarantor

Q. I have been asked to go guarantor for a relative for a loan for a pretty expensive car. The relative in question has a good business on the make but has not been working in it for long and has no real credit history. The car will be used for the business. What do you think? 

A. This is a hard one because you’re caught between your relationship with the borrower and the risks of hitching up to someone else’s business dream. You might even be aware that the history of people going guarantor has not been a great one, especially when it involves relatives and boyfriends in business. The latter is sometimes called STD — sexually transmitted debt! Understand this - if your relative goes broke, gets sick, has a prang, has a relationship bust up or any other business distracting event, then you could be left with a big debt to cover and possibly no asset to actually sell if the car was written off. If you want to help out, treat this as a risk management exercise. Insist on seeing the business plan and make sure that the business has legs. Make sure the car is comprehensively insured and that the premiums are paid in advance a year ahead and ask for annual updates to ensure the asset is covered. Go through the reasons why an insurance company would not pay out, for example, driving under the influence of alcohol. You’re putting yourself into the role of an indirect banker and so you better act like it by playing hardball with the person who is asking a big favour of you. I would recommend using the search engine on this site to research other arguments for and against going as guarantor. 

Published on: Tuesday, September 22, 2009

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