Necessity
Personal guarantees are required when an individual agrees to be personally responsible for a loan or financial obligation taken by another person or business. This is often demanded by banks or lenders when extending credit to small businesses. It provides additional security to the lender, ensuring that if the borrower defaults, the guarantor will cover the debt.
Implications
The guarantor becomes personally liable if the borrower fails to repay the loan. The lender can pursue the guarantor’s personal assets, including property, savings, and income, which could significantly impact the guarantor’s financial stability and future borrowing capacity. Additionally, this liability can affect the guarantor’s credit rating and ability to secure personal loans in the future.
Procedure
The guarantor receives loan documents from the lender. A solicitor reviews the terms and explains the risks associated with the guarantee. The guarantor then signs the guarantee in the presence of the solicitor, who provides a certificate confirming that independent legal advice was given. Detailed discussions regarding the guarantor’s financial situation and potential consequences should be part of this procedure.
Advice Covers
- The extent of liability (limited or unlimited guarantee).
- The implications of default and potential consequences.
- Any options for limiting exposure (e.g., secured vs unsecured guarantees).
- Whether the guarantee is enforceable in all circumstances.
- Potential psychological impacts on the guarantor and the relationship between the guarantor and borrower.