Personal Loans

Personal Loans, Co-Borrowing and Guarantees: Are You Going to Get Your Money Back?

Making personal loans to friends or family members

Making personal loans to friends or family members can be a tricky and emotionally charged. You want to help them, but you may be putting yourself and your finances at risk.

Things to consider before making personal loans

  • What does your friend or family member want to use the loan for?
  • Does the borrower understand that this will be a loan and not a gift?
  • Can the borrower afford to repay you?
  • Can you afford to lose the money if they don’t repay you?
  • What will happen to your relationship if the borrower doesn’t repay you?
  • Will the borrower still repay you if your relationship breaks down?

Make a written loan agreement

Making a written loan agreement before lending money ensures that both parties understand and agree to the terms of the loan. It is also evidence that you can submit if the worst happens and you need to go to a court to claim any outstanding amount owing to you. You can do this yourself with this Secured Loan Agreement Template – Australia.

Signing a loan agreement with a close friend or family member may feel uncomfortable or over-the-top, but it is protection for both of you and it doesn’t need to be complicated if the loan is not for a large amount of money. It should also be a warning sign to you if the borrower is strongly against signing even a simple loan agreement.

What should be in the written loan agreement?

  • The loan amount
  • Any other fees or charges
  • Any interest rate that is being applied
  • The repayment schedule
  • The amount of each repayment
  • The due date of whole amount
  • Details of any guarantee that you as the lender may require (see below for more on guarantees)
  • Details of security over any assets if you require it (see below for more on securities. Security over an asset may be more important if the loan is for a large amount)
  • What will happen in the event of default (failure to repay)

What to do if your friend or family member doesn’t repay

If your borrower fails to repay you, you can send them a “Letter of Demand”. If the borrower doesn’t respond to the letter of demand or doesn’t repay you, you can then start small claims court proceedings. See the LawAnswers blog post “How to Recover Debt – Useful Tips” for more information.

If the loan amount is small (usually $10,000 or less depending on your State), you can take an action in the Small Claims Division of the Local Court. If the amount is more than $10,000 but less than $100,000, the General Division of the Local Court will likely hear the claim (again dependent on your State). If the outstanding debt is more than $100,000, the case will need to be heard by the District or Supreme Court.

If you’re having difficulties claiming the amount from your borrower and especially if the amount is too large to be claimed in the Small Claims Division, you should seek legal advice.

Co-borrowing and guaranteeing a personal loan

The difference between co-borrowing and being a guarantor

As a co-borrower, you will jointly sign a loan agreement with your friend or family member. This means that you are both jointly and individually liable for the debt. If your friend or family member does not or cannot pay their share, then you will have to pay the full outstanding amount.

If you’re a guarantor on a personal loan for a friend or family member, then you will be liable for the debt only if the borrower fails to make their payments. As a guarantor, you may also sign over an asset that you own such as your house as security against the loan. This means that if the borrower doesn’t make their payments, the lending institution may sell your asset to pay off the debt.

What can happen if your friend or family member defaults on their personal loan?

  • You will be liable for the debt.
  • The lending institution may be able to sell your house in order to repay the debt.
  • The lending institution may also be able to force a sale of other assets of yours, even if these assets weren’t security for the loan.
  • You may end up with a bad credit rating or being made bankrupt.
  • You may not be able to get a loan against your asset (such as your house) if it is already security for your friend or family member’s loan.

Personal things to consider before going guarantor

  • Could you help your friend or family member by offering them a fixed loan (for example, towards a house deposit) so that their lending institution doesn’t require a guarantee?
  • Can you afford the repayments if your friend or family member defaults on their loan?
  • What would happen to your relationship if your friend or family member defaults on their loan?

Questions to ask the lending institution before signing on as a guarantor

  • What type of loan are you guaranteeing?
  • What is the repayment schedule and timeline of the loan?
  • What are the repayment amounts?
  • Is the guarantee for a fixed amount or for the full loan? (Remember if you’re guaranteeing the full loan, you’ll be liable for interest payments and other fees on top of the loan amount. It is safer to guarantee a fixed amount).
  • What is the amount of money you’re guaranteeing and how will that amount be calculated if the borrower defaults?
  • Will any of your assets be put up as security for the loan?

If you’re asked to guarantee a business loan, find out as much as you can about the business. Ask to see the business plan. Make sure you understand the financial situation of the business and that the business is financially healthy.
Speak to relevant directors, the business’ accountant and anyone else who can give you a good picture of the state of the business.

Personal loans – Getting legal advice

When making personal loans for a large amount of money or co-borrowing or signing a guarantee for a friend or family member’s loan, it is wise to seek legal advice beforehand. A lawyer can help you understand the risks you are signing onto and make sure that you are signing onto something that protects your interests.

Furthermore, if you have already co-borrowed or signed a guarantee, you should seek legal advice immediately if:

  • You only agreed to the loan or guarantee out of pressure or fear
  • You suffered from a disability
  • If you didn’t understand what you were signing onto and didn’t receive legal advice before signing
  • You believe that the lending institution tricked or misled you into co-signing the loan or providing a guarantee

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