Definition
Personal Guarantee
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When a borrower agrees to provide a personal guarantee for a loan, he or she basically promises to repay the debt in full, and the lender would be able to legally repossess his assets in order to do that.
Personal guarantees are most common with unsecured loans whereby there are no collateral in which the loan is secured against.
This leaves a lender with very limited option (if any) should a borrower default on the loan or even flat out refuses to pay.
This is why small personal loans always have a requirement for personal guarantees.
It puts the borrowers’ personal assets on the line which could include:
- Real property
- Cash in the bank
- Stocks and shares
- etc
They are also a common requirement for small business loans. Especially short term loans for working capital.
Because these types of loans are usually unsecured, and private limited companies can be structured with limited liabilities, a personal guarantee endorsed by directors and shareholders would give a lender enough peace of mind to approve and disburse a loan.
For example, a company limited by 10,000 shares at $1 each would have a liability limit of $10,000. This fact would give lenders little reason to approve a loan for $100,000. Personal guarantees would ensure that the signers’ personal assets can be repossessed for payment of any debt.
While secured loans like housing loans are essentially secured against the property, lenders would already have a target for recourse should defaults occur.
But often times, lenders would rather be safe than sorry and request for personal guarantees as well just so that they can sleep better at night.
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