What are your Rights as a Guarantor?

Have you ever been asked to guarantee a loan so that your friend or someone in your family can borrow money? Or have you guaranteed a loan to help someone? It is not unusual for people to ask those close to them to do this and most will agree so that they can help, but what happens if the borrower does not repay the loan? What are your rights as a guarantor? 

What is a Guarantor? 

A guarantor is someone who agrees to be legally responsible for a specified loan or agreement, should the person who has taken out the loan fail to make repayments.  Guarantors can be party to many types of agreements such as rental/tenancy agreements, personal loans and finance contracts. 

What is a Guarantor Responsible for?

A guarantor’s legal liability will depend on the wording of the guarantee itself. Therefore, it is imperative that before becoming a guarantor that you read and understand the document you are signing. It may not be as simple as guaranteeing the principal loan. Guarantees can also create liabilities for administration charges, interest and costs of recovery in the event of default. A guarantor can also still be held liable even if the guarantor has lost their job, fallen ill or has been made bankrupt.   

Is a Guarantee Always Enforceable?

There are situations in which a guarantee might not be enforceable. These can include but are not limited to:

• Where the guarantee was the product of fraud, negligent misrepresentation or undue influence 
• Where the primary agreement is varied without the knowledge of the guarantor, 
• The guarantor was not made aware of material factors that might affect the relationship between the creditor and borrower

Can a Guarantor Recover Money or Their Loss From The Borrower? 

If a guarantor is forced to settle a borrower’s debt, they might seek to recover their loss, directly from the borrower.  A guarantor can do this by ‘subrogation’, which means “stepping into the shoes” of the lender and taking direct action.   

The requirements for subrogation are:

1. The guarantor has paid under the guarantee.
2. The parties have not by agreement excluded the right of subrogation. 

If a guarantor wanted to seek the benefit of any security granted by the borrower, under the principal agreement, it must be established that the security is for that specific liability. The benefit cannot be claimed if the security covers any additional credit held by either another creditor or the same creditor.      

If you wish to obtain legal advice on being a guarantor or discuss your options to recover any monies, please do not hesitate to get in touch with a member of our Dispute Resolution Team. 

Please note that this information is for guidance only and should not be regarded as a substitute for taking full legal advice on specific facts and circumstances.