A guarantor is a third party that guarantees a loan amount is repaid. Going guarantor can be a risky affair. If the person you are going guarantor for goes bankrupt then you are responsible to pick up the remaining dollar amount on the loan taken up.
We talked briefly about going guarantor in a previous article ‘What is a Family Pledge’, however we didn’t go into too much depth, and with the recent news surrounding Clive Palmer trying to get the Queensland Government to go guarantor on a $35 million loan to keep his Nickel refinery going, it seemed a good time to delve into the topic.
For those who didn’t hear the story, Clive Palmer recently attempted to keep his Nickel Refinery in Townsville, Queensland afloat by taking a $35 million loan out to help ‘trade its way out of trouble’. The Queensland government rejected the idea, suggesting that the plan ‘presents an undue risk to the State…’ But what constitutes an undue risk?
Firstly we need to uncover the implications of going guarantor. Let’s assume that the Queensland government had taken up the deal with Clive Palmer. If the business could not pay back the loan, then the bank would look for alternative places to get back the money owed to them. The most preferable place to get the money back would naturally be the biggest source of money, in this case the government. Because the government is the guarantor of the loan then it is within the rights of the bank to take whatever is remaining on the loan from the government.
Obviously this presents a fairly serious risk for the government. As no matter the size of the assets the firm may hold, external influences may render them void, thus leaving a bank with a large debt to regain and a target painted on the most obvious source of funding.
This logic clearly ran through the Queensland governments head, as they did not take up the deal, however there was still a cost to them. The job security of those working in the Nickel refinery was completely up to the firms stakeholders. Being only one of many sources of income for the firm, it would be logical to cut loose aspects of the business that no longer make profit.
As of the 15th of January this year 237 workers have been made redundant.
In terms of personal finance, going guarantor doesn’t quite have the far reaching consequences that the Clive Palmer deal does, however there are still the same serious risks to face that the Queensland government decided to reject.
But of course sometimes there is no way to work around a financial hurdle other than appointing a guarantor. Large purchases like a first car may require the additional security that a guarantor provides, however it shouldn’t be the first choice. When entering a financial agreement placing you as guarantor, you must read over all of the conditions of the contract. What are you entitled to pay in the case of a defaulted contract? What rights do the banks have on your assets in the case of a default?
To add a few more general rules.
Don’t go guarantor on a loan amount you couldn’t repay with your current income. If you are retired, very carefully consider the risks involved if a loan gets defaulted. Although it might put you in an awkward situation, if your child asks for you to be a guarantor we would suggest you very, very carefully think about saying yes. The implications can be extremely detrimental.