What is a Personal Guarantee?
A personal guarantee is a commitment made by an individual to take responsibility for a debt or other financial obligation if the primary debtor is unable to do so. It is a legally binding agreement between the guarantor and the lender that makes the guarantor liable for the debt if the borrower defaults.
Types of Personal Guarantees
There are two types of personal guarantees: general and limited. A general guarantee covers all of the borrower’s liabilities, while a limited guarantee only applies to a specific debt or obligation.
Advantages of a Personal Guarantee
A personal guarantee can be advantageous for both the guarantor and the lender. For the guarantor, it is a way to show their commitment to the debt, as well as a way to demonstrate their willingness to help the borrower pay off the debt. For the lender, a personal guarantee can offer some protection in the event that the borrower defaults.
Disadvantages of a Personal Guarantee
The downside for the guarantor is that they are responsible for the debt even after the borrower has paid it off. This means that if the borrower fails to make payments, the guarantor is liable for the debt. Additionally, a personal guarantee can be seen as a sign of financial instability, as it is an indication that the borrower is unable to take on full financial responsibility for the debt.
How to Limit the Risk of a Personal Guarantee
The best way to limit the risk of a personal guarantee is to ensure that the borrower is financially responsible. This can be done by obtaining a credit report, verifying the borrower’s income, and obtaining a personal guarantee form. It is also important to ensure that the guarantor understands the terms of the agreement, as they will be held liable if the borrower fails to make payments.