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Taking out a loan comes with a lot of responsibility. So, most lenders require that borrowers have a guarantor over the loan. A guarantor is someone who agrees to pay back the loan if the borrower is not able to themselves. If you are considering being a guarantor for a business loan, it is crucial that you are aware of your rights and obligations. This article will explain the essential things you must consider before becoming a guarantor for a loan.

What is a Guarantor?

A guarantee is a binding agreement involving a lender, borrower and a guarantor. Here, the guarantor promises the lender to pay back the debt the borrower owes if the borrower fails to meet their financial commitments. 

For example, when someone is acquiring a business loan from a bank, you could act as their guarantor. This means that if they cannot pay back the loan, it is your responsibility to pay for it. You may also have to pay: 

  • any fees;
  • additional charges; and
  • interest. 

Despite taking on the responsibility of repaying the loan, as the guarantor, you will not have any rights to own anything that the loan was used to acquire. 

What Should a Guarantor Consider Before Signing the Loan?

Guaranteeing a loan can be a huge risk. So, it is crucial to consider whether you will be able to repay the loan. Before signing the loan, make sure that you have answers for the five following questions:

1. What Type of Loan Are You the Guarantor For?

You should know whether the loan you are guaranteeing has a specific payback time. 

For example, an overdraft could potentially be a never-ending loan. 

2. How Does the Borrower Operate? 

If the borrower is a company, you must do your research and find out everything you can about the business. Request a copy of: 

  • the business plan;
  • any financial statements; and
  • forecasted revenue. 

You want to ensure that the business is in good financial health and has good prospects. This will reduce the risk that they will default, forcing you to pay your guarantee.

3. How Much Is the Guarantee For?

You will need to outline whether the guarantee is for a fixed amount, or for the total amount that the borrower owes.

As a guarantor, it is better to guarantee a fixed amount so you know exactly how much you could owe. This is because if you guarantee the total amount the borrower owes, it may include interest, fees and penalties.

4. Do You Have to Put Up Assets as Security? 

You may be asked to put up an asset, such as your house or car, as security. Here, if the borrower defaults on the loan and you are unable to pay the guarantee, the lender can sell your house or car to reclaim the debt.

5. What Should You Know About the Loan Agreement?

Obtaining a copy of the loan agreement from the lender is vital. This agreement should specify:

  • the amount of the loan;
  • the interest rate; 
  • any fees and charges;
  • whether the loan is secured on any assets;
  • the length of the loan; and
  • the number of repayments.

What Are the Effects of Being a Guarantor?

If you plan on applying for a credit or a loan, you need to tell your credit provider about any loans you are a guarantor for. Your credit provider might take this into account when considering whether or not you can repay a new loan. Being a guarantor on another loan may prevent you from being able to obtain a new loan. This is even if the borrower of the loan you are a guarantor for is making their repayments.

Further, if you are unable to repay the loan as a guarantor, the lender can take legal action against you. You may also end up with a bad credit report if both you and the borrower cannot pay back the guaranteed loan. The loan will be listed on your credit report, making it difficult for you to borrow money and obtain a loan in the future.

If you put up your assets as security, you might not be able to obtain a second mortgage as security for your own loan. If you cannot repay the guaranteed loan, you may even lose your home. 

Key Takeaways 

When becoming a guarantor for a loan, you must repay the loan if the borrower defaults. Guaranteeing that you can repay a loan comes with a huge amount of risk, so it is crucial to ensure you understand everything involved in becoming a guarantor. If you need assistance with reviewing a loan document before becoming a guarantor, contact LegalVision’s banking and finance lawyers on 1300 544 755 or fill out the form on this page. 

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