Think twice before signing surety

Let’s Talk Finances – by Hans Myburgh, registered financial advisor and Northmead resident.

When you apply for a loan, you expect meeting the required repayments to be the hardest part.

What many people do not realise is that the most dangerous part may not be signing the loan agreement, but suretyship.

What is surety?
Surety is when you agree to be held personally responsible for someone else’s debt, if they are unable to pay.

Banks love this because it gives them a second cash cow if things go wrong.

You think you are helping a business partner, a family member, or even your own company, but what you are

really doing is potentially opening the door to unlimited risk.

The fine print trick
Buried in most bank contracts are two phrases you should fear:

• Joint and several liability. This means the loan originator does not have to chase all the people who signed surety; they can pick a single person and demand full payment.

• You may believe you are signing for one specific loan, but the wording usually ties you to all present and future debts of the borrower.

Myburgh shares a real-life cautionary tale:
“A client owned a small business, and as with business, he signed surety for a business loan. Years later, he retired, sold his shares, and settled into a slower pace of life, assuming that his obligations to the company ended when he walked out of the boardroom,” said Myburgh.

“Five years later and under new management, the business collapsed. The bank did not go after the company’s remaining directors but approached the client because he never cancelled the surety he previously signed.

“He spent the better part of his retirement fighting off claims for debts that were never his.”

Surety never seizes on its own
“Many people think that once the loan is paid off, the surety automatically falls away,” explains Myburgh.

“You need to cancel it; if not, it remains in place. Meaning that if a person accumulates new debt or an old businesses collapse, your signature can drag you back into the mess.”

Why are banks allowed to do this?
Financial institutions do not make mistakes. The wording is carefully designed to protect them and keep their options open to recoup losses.

“They want to ensure that if the borrower cannot pay, they will still get their money from every legally available source,” he said.

How to protect yourself
• Read before signing. Do not skim over the fine print; the devil is always in the details.

• Limit your liability by negotiating a cap or restrict surety obligations to a single loan.

• Once the loan is settled or you leave a business, request written confirmation that your surety has been cancelled.

• Keep proof by filing cancellation letters somewhere safe.

The bottom line
“Signing surety may feel like a formality, but it is one of the most serious financial commitments you can make,” said Myburgh.

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