So you want to guarantee a loan for someone?

• to pay someone else's debts (the "borrower" or "debtor") or

• to perform someone else's contract for them.

Guarantees are generally required by a bank when the bank is not convinced that the borrower has sufficient assets to 'backup' a loan. If the repayments are not made, then the bank will sell the asset to recover its money.

You should be very careful if you are asked to provide a guarantee. The second page of this topic refers to some potential problems for a 'guarantor'.

Here are some examples where a bank will ask for a guarantee -

• guarantee by a wife - if a husband is purchasing investment property and to obtain maximum taxation benefits, he wishes to borrow the full amount of the purchase price. If the husband and wife have a home, the bank will ask the wife to guarantee the loan and to 'backup' that guarantee the bank will almost certainly take a mortgage over the family home

• guarantee by a parent - an under age child may be seeking a loan. Or it could be an adult child in business seeking a loan. If the child does not have any real estate the bank may ask a parent to provide a guarantee for the loan and the bank will take a mortgage over the parent's home . Or it could be that the child's own home is already so heavily laden with debt that the bank is not willing to loan more money without more 'security'

• guarantees by company directors - if a company does not have sufficient assets of its own, a bank will ask the directors of a company to guarantee the loan and, to 'backup' that promise to pay the company's debt, the bank will take a mortgage over land owned by the directors. Normally the land would be the family home.

Guarantees have been the downfall of many people. The "Next" page will go into more detail about Guarantees given by spouses. Now occasionally referred to as 'Sexually Transmitted Debt'.