- If a lender thinks a borrower may not be able to repay a loan, they might ask for a guarantee to maximise the chance of the loan being repaid.
- A first-party guarantee is where you guarantee the loan with security in the form of an asset. A third-party guarantee will allow someone else to guarantee the loan.
- Always seek legal advice before entering into a guarantee. Remember that as a guarantor, if the borrower cannot or will not pay the loan, you will handle paying it all back. So you need to take the same care as if you were taking out a loan for yourself.
Role of Guarantor
A guarantee will state that if a borrower cannot make its loan repayments, the guarantor will pay them instead.
Can I be a Guarantor?
Before making the commitment to be a guarantor, you should be comfortable with the borrower and be confident they can meet their loan repayments. You should also be in a position to cover their repayments if they cannot repay. This is particularly important as you may be tying up equity in your property and restricting your ability to borrow funds in the future.
For home loans, guarantors are limited to immediate family members.
Types of Guarantees
There are guarantees for fixed amounts or all monies. A guarantee for a fixed amount provides more certainty compared to all monies. The guarantee should clearly state the exact amount of money you will owe if the worst happens, and the borrower does not pay.
A guarantee can be provided by an individual, company or another type of corporate entity.
Types of Loans
In addition to business loans, there are also home loans. Home loans can be fixed mortgage, variable mortgage, low documentation (low doc) or introductory rate.
There are two main types of loan agreements, unsecured and secured. If you choose to enter into a secured loan agreement, you will be required to provide some form of security to the lender. Also, regardless of whether you enter into a secured or unsecured loan agreement, you may be required to provide a guarantee.
Key Issues
- If you sign a guarantee, you are promising to pay the entire loan back, along with any fees, charges and interest, if the borrower defaults.
- If you are providing collateral security for the guarantee (such as a house or other substantial assets), you should inspect the transactional history between the lender and the debtor, and whether the debtor at any stage has been in default of any debts.
- In some circumstances, a guarantor can withdraw their guarantee before the loan has been provided.
A guarantor provides a limited guarantee. In most cases, this will cover the debt plus 20% for any additional expenses including interest incurred if loan repayments are delayed.
Loan Contract and Loan Agreements
Most loan contracts and agreement contain the following provisions:
- The amount of the loan;
- The interest rate, fees and charges;
- Whether the loan is secured (where the borrower has to put up an asset, such as their house, as security) or unsecured;
- How long the borrower has to repay the loan; and
- The amount of the repayments.
Receiving Documents
If you are a third-party individual guarantor, you should receive the following:
- A copy of the loan agreement in its ready-to-be-signed form, so a full and comprehensive review of the terms and conditions can be carried out by you (or your lawyer); and
- A clear and concise document that explains the rights and duties of a guarantor.
On any guarantee, there must be notice provided to the prospective guarantor that states:
- That the guarantor should seek independent legal and financial advice about the guarantee and how it may affect the guarantor if the borrower defaults;
- That the guarantor may, if they wish, refuse to become the guarantor; and
- That becoming guarantor involves a level of financial risk that should be carefully considered.
Frequently Asked Questions about Loan Guarantees
Q: What is the responsibility of a co-borrower?
A: As a co-borrower, you will be legally responsible for the whole debt if the other person does not make repayments on the loan, not just your share. Do not sign a loan as a co-borrower unless you are also getting a share of the benefit (such as sharing ownership of a house or car).
Q: What benefits do I receive as a guarantor?
A: There are no financial benefits from the transaction.
Q: Can a guarantee be limited?
A: Yes, you can specify to the lender that you will only be a guarantor if you can limit your guarantee to a specified amount of money, and for a limited amount of time.
Q: Is a guarantee secured or unsecured?
A: The lender will tell you whether or not it requires your guarantee to be secured or unsecured. An unsecured guarantee means that the lender does not require a mortgage over your property to make your guarantee more secure. A secured guarantee means that the lender requires you to grant a mortgage over some of your property to secure your guarantee. This makes it easier for the lender in the event that the debtor/borrower defaults under the loan. The lender can sell up your property if you are unable to pay the debt.
How can LegalVision help me?
LegalVision provides businesses and individuals with tailored online legal advice, including loan guarantees. If you are in need of legal advice as a guarantor, looking to sue the party for which you became guarantor, or simply wish to have a set of eyes look over the terms and conditions of the loan or lease agreement, contact LegalVision on 1300 544 755.
