Deeper Dialogues

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What to say

Money

Being asked to go guarantor on a loan

Your daughter, your brother or your dad needs a signature before the bank will lend to them, and it's presented as a formality. It isn't: you're promising to repay someone else's debt if they can't, and the request usually comes from the person you'd find hardest to refuse.

What they need from you, and why

A guarantee is the odd one out among financial favours. No money changes hands, so it feels like a signature rather than a loan. But a guarantor agrees to repay someone else's debt if they can't, and in most of the countries this app serves that promise is enforceable for the whole amount, often with interest and costs on top. Co-signing, common in North America, goes a step further: the co-signer is a borrower from day one. And the request almost always comes from the people you'd find it hardest to refuse, an adult child buying a first home, a sibling who can't get a car loan, a parent whose business needs working capital, often with a deadline attached and a story about how it's only a formality. To them, anything short of yes can feel like you don't trust them.

What they need from you is a straight answer with the warmth said out loud, and a decision made with the documents in hand rather than under the deadline. Consumer regulators in four of the countries this app serves say the essentials in strikingly similar words. ASIC's Moneysmart in Australia says to treat it like you're taking out the loan yourself: you may have to repay the entire debt, you could lose a home or car you've put up as security, it could stop you getting a loan of your own, a default can land on your credit report, and it could damage your relationship with the person you're helping. The US Consumer Financial Protection Bureau, the UK's MoneyHelper and Canada's Financial Consumer Agency say much the same about co-signers and guarantors. The rules on what you're told and how you can get out of a guarantee differ from country to country, and all of them say: read the contract, ask for it early, and get independent legal or financial advice before you sign.

Netta Weinstein and Richard Ryan (2010) found across four studies that help given because the helper wanted to give lifted their wellbeing, while help given out of pressure or obligation did much less, and the difference mattered to the people being helped as well. A yes signed under pressure tends to do less good for either of you than one you've chosen, and a no given early is kinder than a yes you resent for twenty years. The Personal Finance Boundaries module applies its LEND steps here, listen, evaluate, negotiate, document, with three additions: before you answer, ask for the documents and exactly what you'd be guaranteeing, and ask yourself whether you could make the repayments for as long as it takes without putting your own home or retirement at risk; if you say yes, say out loud what would change your mind and agree how you'll hear about trouble early; if you say no, say it early, say it once, and offer the help you can give instead.

Understand it properly

First

Ask for the loan documents and a week to get your own advice before you say anything else, however close the deadline.

You could say

  • I'd love to help you into a home, and I want to do it with my eyes open, because this would be secured against [the house we're retiring in / my savings]. Send me the loan documents, not the summary, and give me a week to get my own advice.

    It separates wanting to help from agreeing to this particular risk, and asks for what every regulator the module quotes recommends: the contract itself, early, and independent advice before you sign.

  • What exactly would I be guaranteeing? The whole loan or a capped amount, until when, and does it shrink as you pay it down?

    A guarantee can cover the whole debt, often with interest and costs on top, so knowing the shape of the promise is the difference between a decision and a signature.

  • If I say yes, I'll want to hear early if anything goes wrong, from you, not the bank. If you're going to be short, I want a message that week, not after the bank writes to me.

    Setting the early-warning arrangement now, out loud, makes it part of the deal rather than an accusation after the first missed payment.

  • I'll look at it properly, and an overdraft with no end date is open-ended for me as well. Can I see the plan and last year's figures, and can we ask the bank whether the guarantee can be capped and reviewed in twelve months?

    The module notes Moneysmart singles out business loans: ask for the plan and the figures, and be wary of a guarantee with no clear end; a cap and a review turn an open-ended promise into something you can both live with.

  • I want you in that job, and I'm not going to co-sign, because on this loan I'd be a borrower from day one. What I can do is lend you the deposit for a cheaper car, with a repayment plan we both write down, or come with you to see what the bank will do without a co-signer.

    It takes their goal seriously, declines the specific instrument for a specific reason, and offers help that keeps the risk where you can see it.

  • I can't take on that risk. That isn't a judgement on you, and it won't change anything between us.

    A no doesn't need to be dressed up as advice about their finances; said early and once, it's kinder than a yes you resent for twenty years.

If it goes badly

Three ways this can turn. Read the one that happens; the others can wait.

You've said something like

I'd love to help you into a home, and I want to do it with my eyes open, because this would be secured against [the house we're retiring in / my savings]. Send me the loan documents, not the summary, and give me a week to get my own advice.

  • If they say you obviously don't trust them, or their partner

    This isn't about trusting you. It's about what I could carry if things went wrong, and I'd be asking the same questions of anyone.

    Wanting to help and agreeing to this risk are two different things; keeping them apart lets you hold on to both the relationship and your answer.

  • If they push the deadline and say the bank needs it by Friday

    If the bank can't give me a week to read the contract and get advice, then my answer by Friday is no. I'd rather give you a real answer than a rushed one.

    The regulators the module quotes all say the same thing: ask for the contract early and get independent advice before you sign, and a lender cannot force anyone to co-sign. Moneysmart adds that pressure to guarantee a loan may be a sign of financial abuse, and support exists for that too.

  • If they go quiet, or stop calling after a no

    I've been thinking about you. How did [the house / the car / the bank] go? I meant what I said about helping with [the deposit / a budget].

    Following up shows the no was about the risk and not about them, and the alternative you offered only counts if you repeat it.

Share these words

Send them to yourself, or to someone helping you.

Try not to say

  • "Of course, darling, just send me the forms."

    Signing without reading, sometimes against your own home. You're signing the contract, not the summary.

  • "We never had help, you'll manage."

    A no with a lecture attached. "I can't take on that risk" is complete.

  • "You've never paid anyone back in your life."

    True, perhaps, cruel, and the end of the conversation. Decline the risk, not the person.

  • "It's only a formality."

    In most of the countries this app serves the promise is enforceable for the whole amount, often with interest and costs on top, and a co-signer in North America is a borrower from day one.

  • Deciding by Friday because the bank needs it by Friday

    A yes given under pressure tends to do less good for either of you than one you've chosen. The deadline is theirs; the risk is yours.

Afterwards

If you said yes, put the arrangement between you in writing the same week, even with family, because the lender's contract covers them and not you, and ask the lender whether you'll be told if payments are missed; in some countries you have a right to statements, in others you have to ask. If you said no, don't explain it again, and make the alternative real: transfer the deposit contribution, book the afternoon going through the lender's options together, or send the details of free financial counselling (free and confidential in Australia; most of the countries this app serves have an equivalent). Either way, check in within a few days with a message about them, not the loan. And if you're the one asking someone to be your guarantor, lead with the risk, hand over the documents, suggest they get their own advice, and take a no gracefully: they are refusing a risk, not you.

Understand it properly

The words above come from these. A section is about ten minutes; the whole module is there when you have longer.

Where this comes from
  • Deeper Dialogues, Personal Finance Boundaries: going guarantor and co-signing, the four guarantor scenarios (first home, car loan, a parent's business, asking someone to guarantee your loan), the LEND framework and alternatives to lending, Weinstein and Ryan (2010), what ASIC Moneysmart, the CFPB, MoneyHelper and the FCAC say about guarantees, free financial counselling

We gather and pass on what researchers and support organisations have found. This isn't a replacement for a doctor, counsellor or support service.