“Creditors have better memories than debtors.” (Benjamin Franklin)

At the time, it might seem like no big deal. When the bank won’t give your child or sibling or friend a loan, and they ask you to stand surety, it’s easy to think that you’re just doing a good deed by helping out.

After all, all they really need is a signature on a page. You can’t imagine that there could be real consequences.

Unfortunately, however, standing surety for someone else’s debt doesn’t always end well. Many people know stories of wealthy individuals who ended up being ruined because of their willingness to ‘just do someone a favour’.

It is a big deal

Standing surety is far more than just a matter of vouching for someone else. You are promising to pay their debt if they don’t do so.

That is not an agreement that should ever be entered into lightly. No matter how well you know somebody or how much you trust them, you should only sign surety for someone else if you have genuinely considered the worst-case scenario.

You also need to be absolutely clear on what you are getting in for. So, here are four things to think about before signing on the dotted line:

  1. Do you know why the bank won’t issue the loan without someone standing surety? In the case of your child needing a student loan, that might be obvious, but in other circumstances you should be fully aware of the reasons. Get a full credit record for the person you are signing surety for. Know what their income is. Ask them to at least put down some sort of a deposit. If someone is asking you to stand surety for them, they shouldn’t take any offense at you wanting to know exactly what financial state they are in.
  2. Be clear on your exposure. If you are standing surety for someone buying a house for example, does that just cover the home loan, or all the other costs associated with owning a property as well – such as rates, municipal services and insurance? Also note whether the surety agreement binds you as “surety and co-principal debtor”. If that is the case, the bank does not need to first try to recover any debt from the person you are standing surety for. They can come straight to you. If there are any unfamiliar legal terms in the document, make sure you understand their effect on the extent of your exposure before you sign! 
  3. Put a limit on your exposure. Personal surety agreements do not need to state exactly the amount you are standing surety for, or for how long. If you sign something this open-ended, your suretyship will not be limited to a specific debt and it will not end when that debt is repaid. In other words, you will be making yourself liable for all future debts that this person ever incurs. This can have devastating consequences. To avoid them, make sure that the amounts and time frame are clearly stipulated and limited. 
  4. Keep up to date. Don’t simply sign a suretyship and forget about it. As long as you are exposed, insist on knowing whether the person you are standing surety for is keeping up with the repayments and meeting all of their obligations. It’s much better to spot a problem early than to be caught unprepared when it has gotten out of hand.
Another retirement-destroyer – family loans

Be equally careful of actually lending money out. It’s very tempting indeed to help out family members in their times of need, but particularly later in life don’t lose sight of the dangers. Often the request is for a loan to help fund a business venture, and the reality is that businesses fail all the time, often without warning. It won’t help anyone if your child’s business goes belly up and takes your retirement nest egg with it. If you do make a loan, make sure you can survive losing it!

If you are thinking of standing surety for anyone, or making them a loan, it is always best to first seek professional advice.

Disclaimer: The information provided herein should not be used or relied on as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your professional adviser for specific and detailed advice.

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