With financial institutions tightening up their lending requirements in recent years, it has become increasingly common for lenders to require additional security as part of their lending criteria. One form of additional security can come in the form of a personal guarantee.

Before agreeing to become a guarantor for another person, it should be understood what this entails and the risks that come with it.

What Is A Guarantee?

A guarantee is essentially a promise made by one party (called the guarantor) to another party (the lender) that the borrower will perform his/her obligations in accordance with the terms of the loan agreement and if the borrower defaults then the guarantor will perform the borrower’s obligations. Normally this relates to payment of monies owed but can extend to other obligations.

Personal guarantees have two parts. The first is the promise to pay. The second is an agreement to indemnify the lender against any costs, expenses and losses suffered or incurred by the lender.

What Does Being A Guarantor On A Loan Mean?

Being a guarantor involves helping someone else get credit, such as a loan or mortgage. By acting as a guarantor, the guarantor ‘guarantees’ someone else’s loan or mortgage by promising to repay the debt if the borrower is unable or unwilling to do so. You should be wary of providing a personal guarantee. At the very least, you should only agree to be a guarantor for someone you know well. Often, parents will act as the guarantors for their children to help them take the first step onto the property ladder.

How Much Is Being Guaranteed?

It is important to check how much the guarantor is guaranteeing. Some guarantees limit the principal sum whereas other guarantees will be unlimited. In either case, the lender will be able to pursue the guarantor for interest and costs on top of the principal sum.

What Happens If A Guarantor Refuses Or Unable To Pay?

The nature of a guarantee dictates that if the borrowers become unable to repay their loan, the responsibility falls on the guarantor to pay the full amount, plus interest and other fees associated with the guarantee such as legal costs. If a guarantor is unable or refuses to pay the lender, the guarantor may be in breach of the guarantee agreement. A breach of guarantee agreement entitles the lender to pursue legal action against the guarantor, and the lender may seek to enforce its guarantee against the assets of the guarantor. This could include the family home.

Can A Guarantor Be Removed From A Loan?

A person who agrees to guarantee a loan can, by written notice to the lender, withdraw from the agreement at any time prior to the provision of credit to the borrower. The guarantor can generally seek to withdraw from the guarantee after the credit has been provided to the borrower but the guarantor will still be liable for the debt outstanding at that time.

What Happens After Guarantor Pays The Debt?

If the borrower defaults under the loan and the guarantor pays off the amount owing in full then the guarantor is entitled to pursue the borrower for the monies that the guarantor has paid. Whether the borrower has any money to pay the guarantor is another issue.

Do You Really Want To Do This?

Many people feel pressured into signing a guarantee for a number of reasons. In some cases people enter into guarantees to preserve a relationship with a family member. In other cases, a spouse feels he or she has no choice because the family is dependent on the income generated by the business requiring the loan.

How We Can Help

Giving a personal guarantee is a serious undertaking. A guarantor’s personal assets are at risk in the event of default. Lenders do pursue guarantors. Think carefully before agreeing to be a guarantor and ensure that independent legal advice is sought from our expert lawyers.

Contact Us

Get the best representation. Contact Quinn & Scattini Lawyers’ experienced mortgage and guarantee lawyers on 1800 999 529, email mail@rmold.newwebsite.live or submit an enquiry below.

We are available to meet with you at any of our local offices (Brisbane, Gold Coast, Beenleigh, Cleveland and Jimboomba) or by telephone or video-conference.

The information given this in this article is general in nature and is not to be relied upon in entering into a guarantee. This article is for your information and interest only. It is not intended to be comprehensive, and it does not constitute and must not be relied on as legal advice. You must seek specific advice tailored to your circumstances.