Guarantee Agreement: Everything You Need to Know
It may be used in any number of situations, but it is used to define the parameters of someone who is acting as the guaranty or guarantor in a loan situation.3 min read
A guarantee agreement may be used in any number of situations, but ultimately, it is used to define the parameters of someone who is acting as either the guaranty or guarantor in a loan situation. If you are agreeing to be the guarantor for someone, you are essentially agreeing to take on their debt (student loans, mortgage payments, rent payments, etc.) in the event that they are unable to pay. By using a Guarantee Agreement, all parties can be provided protection, as the agreement will spell out the specific expectations or responsibilities of all the parties involved.
The two primary situations in which you would want to have a guarantee agreement would be:
- Someone is behind on their bills and you are wanting to help them avoid collections by paying what is owed, on their behalf
- You are willing to act as the cosigner for someone who is attempting to obtain a loan for a house, car, school, etc.
When entering into a guarantee agreement, your obligations (as the guarantor) can be either absolute or conditional. The differences between the two are:
- In the case of an absolute obligation, you as the guarantor are fully responsible for paying the obligations of the guarantee, should they end up being unable to do.
- In the case of a conditional obligation, you are generally only responsible for a certain amount or for a certain time period. For example, perhaps paying a specific amount that is owed on a credit card to ensure that it does not go into collections.
Proceed with Caution
Before you enter into a guarantee agreement, you will want to be certain that you are fully aware of what is going to be expected of you.
If you are a business owner, you may find yourself in the position of having to personally guarantee the debts of your business. This essentially means that, if for some reason, the business cannot meet their financial obligations (pay debts), then you, as the business owner, will be responsible for doing so out of your personal finances. It is largely advisable that business owners not do this, as it can put your personal finances (and, that of your family) at risk, but in some instances a bank or financial institution may require it before providing a business loan.
The knee-jerk reaction may be to say, “yes, it’s risky, but as a business owner, I have to take risks.” While that is all well and good, any risks one takes a business owner should be calculated ones.
As a business owner, if you are going to be signing a guarantee agreement (in this type of scenario, you as the business owner would be the guarantor, while the business itself would be the obligor), you will want to review it, thoroughly, to make the following determinations:
- Is there a cap regarding personal liability and are all parties comfortable with that cap?
- Can any cap be changed (increased) without permission from the guarantor?
- What are the parameters of the agreement? Is the obligation fulfilled with a certain dollar amount, or a particular time period?
- What kind of measures can be taken by the bank, creditor, etc., to get the signor of the contract to pay, before seeking out the cosigner (or, guarantor) to pay.
When it comes to loans, all of this is generally stated fairly clearly on the loan documents. Although, the amount of the obligation owed as stated on loan documents does not usually include interest, late fees, processing fees, or other additional costs associated. In short, as the guarantor, you will be ultimately responsible not only for the amount of the loan, but for those additional costs as well.
If dealing with a line of credit, the documents will provide the maximum amount of the guarantor’s liability. However, just as with loans, this amount cited on the documentation is not going to include any additional fees or interest. Additionally, with lines of credit, especially in cases in where the business has multiple partners, all of whom may be on the hook, financially, for having to repay debts in the event that the company, itself, cannot, it is important to keep in mind that even if only a portion of the line of credit is used, the obligation of repayment (and, interest, fees, etc.) apply to the entire amount.
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