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There are various situations where someone may ask you to provide a personal guarantee. Parents sometimes act as guarantors for their children’s home loan, and directors can provide a personal guarantee if their company is borrowing money. When you make a personal guarantee, you agree to take on the debt of a borrower or debtor if they cannot pay themselves. As the guarantor, this is an inherently risky position. If the other party cannot pay their debt, you will be the first option for the guaranteed party to collect. Therefore, you need to take adequate steps to minimise your lending risk. This article will go through four tips to help you do this.

1. Have All the Necessary Information

Before you agree to be a guarantor in any situation, you need to make sure you have all the facts before signing. Thoroughly read through any loan contract or sales agreement, and make sure you understand what your obligations are in the situation. Any guarantee must be a written agreement you have signed that specifies:

  • the amount of money you are responsible for;
  • when you have to pay, such as when the borrower defaults or cannot pay; and
  • how long your obligation lasts.

Find out why the borrower needs a guarantee in the first place so that you know what element of risk exists. You should take steps to make sure the borrower can pay back their debts. You may work out a repayment schedule with them to ensure they are paying back their debt. If you are a company director, you need to take an active role in its significant management and financial decisions to ensure it meets its obligations.

If you guarantee a consumer credit contract, the lender is responsible for being transparent and upfront with you about the contract terms.

2. Negotiate a Limitation for Your Personal Guarantee

A guarantee can be:

  • fixed for a certain period;
  • continuing into the future;
  • limited to a specific dollar amount; or
  • unlimited, covering the debtor’s future borrowing as well.

When you agree to guarantee all of the borrower’s debt to another party, including their future borrowing, this is an ‘all obligations’ guarantee. 

For example, say that you agree to guarantee your friend’s home loan. If you are not careful about the terms of the guarantee, you may also be responsible for any future borrowing they do to improve the home.

It is in your best interest to try to negotiate a limitation of some kind on the guarantee. This reduces your risk because you take on less of a financial obligation. This could play out in a couple of different ways. You could negotiate for a:

  • specific dollar amount you are responsible for;
  • release from the guarantee in certain circumstances;
  • specification that your obligations end when the borrower pays back their debt; or
  • time limit that your obligations apply for.

Try to negotiate for a limitation as early as possible. However, the lender does not have to agree to your terms. 

3. Seek Legal Advice

Guarantees are complex documents, and you will often deal with large amounts of money, which you may end up being liable for if the borrower defaults. Therefore, you must seek legal advice before agreeing to be a guarantor, especially if you have never done it before. An experienced lawyer can explain how the guarantee will impact you and identify what the risks are. They can also help you negotiate to improve your position as the guarantor and limit those risks.

For example, even after you have signed a guarantee, a lawyer can help you cancel it if you want to limit the amount you have to pay if the borrower defaults. A lawyer may also help you avoid having to give a guarantee at all. They can help you prepare evidence to prove either your or the borrower’s reliability to the lender.

4. Protect Your Assets

When you give a personal guarantee, the bank or lender will draw from your personal assets to pay back the debt the borrower owes if they default. Therefore, it is worth looking into ways you can protect important assets. One way you can do this is to take them out of the pool of assets the bank or lender can collect from by putting them into a trust or transferring them into your company’s ownership. A lawyer can also help you do this.

For example, to protect the family home, you may put it into a trust to protect it against debt collection.

Key Takeaways

If you agree to act as guarantor on a loan, make sure you are fully aware of the risk you are taking on. Be aware of the borrower’s circumstances, and keep up to date about their repayment schedule. You should always seek legal advice before you agree to provide a personal guarantee. If you would like more information or help with minimising your risk as a guarantor, contact LegalVision’s regulatory and compliance lawyers on 0800 005 570 or fill out the form on this page.

Frequently Asked Questions

What is a guarantee?

A personal guarantee is a legal promise you make to take on a borrower’s debt if they cannot pay it. If you guarantee another party’s loan, ensure you keep up on their loan repayment.

When would I make a personal guarantee?

You can provide a personal guarantee in any situation where someone else is taking out a loan. For example, you may provide a personal guarantee so that a family member can get a mortgage for their first home.

Do I have to provide a personal guarantee?

You should never give a guarantee if you feel pressured or do not want to. However, some business contracts may require a personal guarantee. For example, if your company is borrowing money, the lender may ask for a guarantee from your directors to cover the debt if the company cannot pay.

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