We’ve all heard the adage "neither a borrower nor a lender be” … wise words, but pretty hard to adhere to in today’s consumerist world!

Sure, there are the fiscally fantastic – those rare, disciplined souls who manage their piggybanks wisely from about the time they leave nappies. They amass a fortune – without ever gracing the door of a moneylender or paying a cent in interest.

For most of us, though, debt is a part of life … the student loan … the car … and, eventually, the house. In this land of the self-made, some type of business loan is often on the cards, too.

Yes, very few of us will get through life without going cap in hand for some type of significant loan.

Remember: debts not only come with interest, they come with contracts, too.

The fine print

While you’d struggle to find a household without something on hock, how many people are actually au fait with the nuts and bolts of their loan agreement? Mortgages, for example, can nowadays be taken over 30 years. Fortunes can fluctuate dramatically over three decades.

Be realistic. Think: What if?

Your loan agreement can make all the difference, if times get tough. The bigger the loan, the more important it is to crunch the numbers properly and seek advice from your legal and financial advisors at the start. For us, "the big picture” and the fine print go hand in hand so, if the worst does happen, we’ll ensure you’ve got the best shot at keeping your head above water.

Moneylenders

Banks, often the first port of call for those needing finance, tend to favour "bricks and mortar” security. How you present your information to the bank is vital. The help of your financial and legal advisers can mean the difference between success … and walking away empty-handed.

For borrowers the banks deem "too risky” there are higher-interest options from other types of lenders prepared to accept extra risk.

When you’re contemplating getting a loan – especially a significant one – you really do need professional advice on the type and term. What suits you will depend not only on your personal circumstances, but your personality.

Do you want the security of fixed interest or the swings and roundabouts of floating? Revolving credit is another option. All of your income goes into your mortgage account, which minimises interest payments - fabulous for those who have a budget and stick to it, disastrous for the financially fickle. And, then, you can also opt for a mix of all three.

Take independent advice and choose wisely – it could save you big money … and your sanity.

Asked to go guarantor?

Going guarantor is fraught. I have seen families torn apart, and well-meaning guarantors ripped off, left paying a far greater debt than the one they agreed to cover.

If you absolutely must go guarantor, here are some non-negotiables:

• At the risk of sounding like a stuck record, get advice first and ensure your interests are protected – no matter how much you love and/or trust the borrower. Financial woes do funny things to personalities and values.
• Secondly, insist the amount you are guaranteeing is capped. Under a typical arrangement, Henry guarantees Sue’s $10,000 debt. If the amount has not been formally capped at $10,000, Sue can then, unbeknownst to Henry, borrow another million dollars, for which poor Henry is also liable. No matter the term of Sue’s loan, if she defaults, Henry is required to pay the loan in its entirety immediately.
• Thirdly, ensure from the outset you are sent all of the information pertaining to the ongoing activity around the debt. Although entitled to that information, you only get it if you ask.
• Have yourself formally discharged as guarantor as soon as the original debt is repaid, or run the risk of the borrower getting a new loan over which you are – unwittingly – guarantor.

My over-arching, general advice is: Avoid this weighty responsibility, if you possibly can. If you really can’t side-step it, take independent legal advice as soon as you’re asked to go guarantor, and ensure you go into this commitment with eyes wide, wide open.

Feedback, comments and questions are always welcomed – please feel free to e-mail me on [email protected].

T: 03 443 0900

W: www.aspiringlaw.co.nz



Janice Hughes is a Director of, and senior legal adviser at, Aspiring Law.