Before you agree to go guarantor it is important to remember that as guarantor you will be stepping into the shoes of the borrower in the event they are unable to satisfy the terms of the loan with the lender. Below are some questions that you may want to ask before you agree to be a guarantor.
1. What is a Guarantee?
A guarantee is a promise by the guarantor to assume the debt obligation of a borrower if that borrower defaults under the terms of the loan contract.
2. Is it a Limited or Unlimited Guarantee?
A guarantee can be limited or unlimited in amount, meaning as a guarantor you can be liable for only a portion or all of the debt. You should discuss the type of guarantee you are capable of providing with the borrower.
3. What is an Indemnity?
In addition to the guarantee amount you are generally also responsible for the losses incurred by the borrower. If the borrower defaults, the indemnity gives the lender the right to shift the loss it incurs onto you.
4. How do I know the Borrower can afford the Loan that I am guaranteeing?
You will need to satisfy yourself that the borrower is able to meet the terms and conditions of the loan, including whether they have the ability to meet the required repayments.
5. Will I receive notice if the Borrower is in default under the Loan?
This depends on the terms of the loan, as you may not be entitled to notice of the borrower’s default.
6. Does the Bank have to take enforcement against the borrower first to recover the debt before taking legal action against me as a guarantor?
No. Generally, you have no right to insist that the lender proceeds first against the borrower before enforcing the guarantee. This means that in the event the borrower defaults, your assets can be sold by the bank to repay the loan under the guarantee.
A lender generally requires that a guarantor receive independent legal advice on guarantee documents before signing.
A solicitor is required to sign a certificate assuring the bank that you have willingly signed the guarantee after having received independent legal advice on the effect of the document. The advice received may just be the most important advice you ever receive.