You have a relative who is borrowing money. The bank says it will not loan the money unless someone else guaranties repayment. Your relative has asked you to sign that guaranty. Should you guarantee a loan?
Banks often require a third person to sign a guaranty when the borrower has bad credit or questionable means of repaying the loan. The bank wants a guaranty from someone with good credit and assets that the bank can come after if the borrower defaults on the loan.
If you are considering signing a guaranty, you should be confident that you can repay the loan if necessary without suffering financial problems.
Many people sign guaranties thinking that they only have secondary liability behind the borrower. The fact is, however, that almost all guaranties state that the bank can come after you first if it chooses if you guarantee a loan.
Can you sign a guaranty and limit your exposure?
The answer is yes, and there are several ways to do this. We will look at these using an example of your relative borrowing $20,000 from the bank.
First, you should ask the bank if it will accept a limited guaranty. For example, ask the bank if it will accept a guaranty from you for only $10,000 instead of the entire $20,000.
Second, you can ask the bank to put a time limit on your guaranty. If your relative is going to repay the $20,000 over the course of four years, the guaranty agreement can state that it expires after two years.
Third, the bank may allow each payment made by your relative to reduce the amount of your guaranty. So, after your relative repays $1000, your guaranty would then be $9000, and so on.
Finally, you should obtain a written agreement from your relative stating that he/she will repay you if you guarantee a loan and have to pay the bank.
Will the bank negotiate over the terms of a guaranty?
Most banks have preprinted forms for a guaranty. Even so, the bank wants to make a loan, and loan officers are usually open to negotiation on the loan terms, including a guaranty. In any event, you should not simply sign the preprinted form without talking to the loan officer about limiting your liability.
Consult a Lawyer.
If you are considering signing a guaranty of someone else’s loan, speak to one of our business Lawyers to be sure you understand the risks and consequences if you guarantee a loan. Call 601-202-1111
Pepper & Odom Law Firm
Ridgeland, MS 39157
Original Content by: Attorney Craig Panter of The Panter Law Firm