What are the risks of guaranteeing a loan?
August 8, 2023 | 50,00 EUR | answered by Carsten Ahlert
Dear lawyer specializing in banking law,
My name is Benjamin Baradari and I have a question regarding guaranteeing a loan. Recently, a friend asked me to act as a guarantor for a loan on his behalf. Trusting him, I initially agreed without fully understanding the possible risks involved. However, I am now concerned that guaranteeing this loan could lead me into financial difficulties.
My friend has assured me that he is capable of repaying the loan. Nevertheless, I wonder what risks are associated with being a guarantor. What happens if my friend is unable to repay the loan? Am I automatically obligated to make the payment? Can the bank access my assets directly without first demanding repayment from my friend?
I have heard that guaranteeing a loan often comes with high financial obligations and can impact my credit rating. Is this true? Are there ways to protect myself from these risks or limit my liability?
I would be grateful if you could provide me with an assessment of my concerns and suggest possible solutions. I would like to understand the potential consequences of guaranteeing a loan and how I can protect myself from them.
Thank you in advance for your assistance.
Sincerely,
Benjamin Baradari
Dear Mr. Baradari,
Thank you for your inquiry regarding guaranteeing a loan. A guarantee is a serious legal obligation that comes with risks that you should be aware of. When you act as a guarantor for a loan, you take on the responsibility of repaying the loan amount if the actual borrower is unable to do so. In this case, the bank can actually access your assets without first asking your friend to repay.
It is important to understand that guaranteeing a loan can lead to you being required to make payments if the borrower defaults. This can significantly impact your financial situation and affect your creditworthiness. If you as a guarantor default on payments, this can lead to negative entries in your credit report and make it harder to take out loans in the future.
However, there are ways to protect yourself from these risks or limit your liability. For example, you can agree with the bank to only be liable up to a certain amount or that your liability is limited in time. It is important to carefully review these terms before signing the guarantee agreement and make any necessary changes.
Furthermore, you should make sure that your friend is able to repay the loan before you guarantee it. You can also make an agreement with your friend stating that in case of default, he will cover the costs of the guarantee.
I strongly recommend that you consult with an experienced banking attorney to discuss your situation in more detail and work on possible solutions. An attorney can help you understand your legal options and assist you in protecting yourself from financial risks.
I hope this information is helpful to you and wish you success in resolving your situation.
Best regards,
Carsten Ahlert
