The concept of guaranteeing a debt is simple enough, however the legal and financial consequences of going guarantor are significant. Financial institutions and lenders require their clients to obtain independent legal advice prior to processing a guarantor application.
The legal advice provided by the lawyer should be comprehensive, advice in this context is not merely witnessing your signature, rather the lawyer should explain the terms and conditions of the agreement and outline the advantages and disadvantages of entering into the agreement. The lawyer should allow sufficient time between the provision of the advice and you signing the document for you to reflect on its content and on the advice provided.
The lender will look to the guarantor for repayment should the borrower fail to meet the repayment obligations under the loan. If an asset is put forward by the guarantor as security, the lender may take all steps necessary to recover all amounts owed under the guarantor agreement, this includes selling assets and using the funds to pay the loan amount, interest as well legal fees incurred by the lender.
Is there anything I should be doing prior to signing?
Prior to signing up as a guarantor, you must ensure that the borrower can satisfy the terms of the loan; this is your responsibility, not the lender’s. You should request the loan agreement between the lender and the borrower so that you are aware of its terms and conditions, in particular, the events of default listed in the loan agreement.
You must sign the guarantor agreement voluntarily and without undue pressure from any another person. Your lawyer may well advise you against entering into a guarantor agreement (and they should if the terms are onerous or against your best interests), however the ultimate decision rests with you.
The advice received from the lawyer is strictly legal, it is recommended that a potential guarantor also seek independent financial advice.
Written by Malik Anne