Calculating the risk of co-signing a loan

People are being urged to check, double check and triple check any lending agreements they’re co-signing for whānau or friends, as tighter lending controls for Aotearoa near.

The Credit Contracts and Consumer Finance Act (CCCFA) comes into force on 1 October 2021.

This will bring a new level of scrutiny for lenders, but borrowers are being encouraged to weigh up the risks of signing credit contracts – particularly on behalf of whānau and friends.

Centrix data shows vehicle finance was the number one credit product in demand by sector in March, for the second month running. This is nearly a 10 percent increase on the year before.

Care Waitakere Trust senior financial mentor Fiona Halliwell says they have seen several furniture hire purchase or vehicles loans, where a friend or family member has co-signed for credit.  They often have nothing to do with the asset and are completely unaware that they will be responsible for the debt if it is unpaid.

Some clients have little knowledge of the detail within the contract they have signed and many of the loans have unnecessary, and sometimes worthless ‘add-ons’ that are front-loaded, and then high interest charged.

Default interest is not understood, which leads to confusion and misunderstanding of what the final costs will be when payments become difficult.

Vehicles are frequently sub-standard and purchased with no knowledge of the Consumer Guarantees Act which protects buyers when the car repeatedly fails.

Often comprehensive/third party insurance is not taken out, leaving the borrower with a massive debt to pay and nothing to show for it if the vehicle is damaged or stolen.

There are also some clients who do not understand that if their car is repossessed for non-payment, they are still responsible for the remaining loan post-sale.

Co-signatories or guarantors are often unaware that they are equally responsible for these debts.

Fiona is urging people not to sign anything they do not understand or cannot explain fully to someone else.

“If you do not have someone to look over your contract, take it to Community Law or a financial mentor before signing,” she says.

“Do not guarantee or co-sign a loan that you are not prepared to take on responsibility for all future payments.”

She hopes the upcoming changes to the Act means it will be easier to get loan application documents when assisting clients in hardship, and the information gathered on co-signatories and guarantors will be included.

And she’s not the only one urging people to look at all the risks.

Personal finance expert Tom Hartmann, of Sorted, says people often generously act as guarantors, especially for whānau, but without fully understanding the risk they are taking on.

“We recommend looking into it more closely to understand what could happen if the borrower defaults, and to take advice.”

He urges people to carefully think through becoming a guarantor for someone’s loan – especially if it affects long-term saving and investment.

People will frequently discard their long-term plans for short-term wins, but it all needs to be weighed up carefully.

“Good advice is gold here,” he says.

Sorted expects the CCCFA coming into force later this year to provide a new level of scrutiny into the decisions made by lenders.

Tom says some loans will still end up being approved that the borrower should perhaps reconsider, and there is always a level of responsibility that borrowers need to have to make sharp money choices.

“Just because you can afford it doesn’t make it a good choice.”

And his advice is being echoed by the Eldernet Group director Esther Perriam.

There‘s evidence people become more trusting of others as they age, which can create an environment where some older people may be coerced into situations where they may purchase something they don’t want, or agree to act as a guarantor when they don’t want to.

Esther says if you’re signing a financial contract yourself or agreeing to make payments if the person you’re acting as guarantor for doesn’t, you need to work out a careful budget to ensure you can make the payments and still have enough to cover your living costs.

“Don’t take someone’s word that they will make the payments, even if they’re a close friend or family member – unexpected events, like job loss, occur for everyone.”

“If you will not have the funds to comfortably make the payments, it’s better to not sign the contract,” she says.

“People who care about you will not ask you to take financial risks and will understand if you do not wish to take on commitments you’re unable to manage.”

She says the greater transparency and levels of protection the changes to the CCCFA will bring are great news for consumers.

“Nothing will protect you 100 percent however, so always make sure you triple check everything before entering into any agreement.”

Stop! And take a look at the risks

  • Our experts have shared some tips to help keep your finances safe when being asked to co-sign or guarantee a loan for a member of your whānau or friend. These are:
  • Know the risks of signing contracts and of agreeing to be a guarantor
  • Never, ever rush into signing anything
  • Most, if not all, contracts can wait a day or two before they need to be signed – use this time to read the entire document, especially the small print
  • If the print is too small for you to read, ask for it to be supplied again in a size that is readable
  • Always check that anything you’ve been told is written in the contract
  • Ask for clauses you don’t agree with to be deleted. Just make sure all changes are signed by all parties
  • Many contracts have a cooling off period, where you can change your mind. Before signing a contract ask how long the cooling off period is
  • Be wary, take your time, and discuss big decisions with a trusted friend or advisor

The MoneyTalks helpline team is available to talk with people about their contract and discuss the key parts before the borrower signs.

The helpline is not there to tell someone they should or shouldn’t proceed with the contract, rather highlight the costs, amounts, terms and any unforeseen costs and share knowledge giving the borrower the power to decide.

If you are unsure about co-signing or being a guarantor for a loan, contact our free, national MoneyTalks helpline team on 0800 345 123.

This article was originally published at https://www.fincap.org.nz/calculating-the-risk-of-co-signing-a-loan/

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