A Guarantor is a person who gives a promise or “Guarantee” to a creditor or lender to be answerable for the debt for obligation of another (the principal debtor or borrower) if that other defaults.
Most guarantees provide that the creditor can call on the guarantor to pay the debt in full (if it is due) without requiring payment from the borrower and without exhausting the creditor’s remedies against the borrower or any securities given by the borrower.
Financial Position of Borrower
Because a guarantee exposes a guarantor to potential liability for another person’s debt without any direct benefit, logically nobody should give a guarantee. In practice however, the guarantor’s decision to give a guarantee is determined by weighing up the following:
- What is borrower’s ability to service and repay the loan?
- What is the creditworthiness of the borrower?
- What is the risk?
- What is the likelihood of the debt being called up?
Your Obligation as Guarantor
If you choose to give a guarantee the following provides a summary of most standard guarantee documents.
Most guarantees are “All Obligations” guarantees, i.e. the guarantor is liable for all the principal debtor’s obligations to the creditor and are not limited to the particular transaction which gave rise to the request for the guarantee. The guarantor’s liability also extends to all debts that the principal debtor already owes to the creditor.
If the principal debtor has given the creditor a guarantee (i.e. is acting as a Guarantor) for yet another person or company, the guarantor will be liable
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