Freddy has a lesson on giving a guarantee
With life on the farm keeping Farmer Freddy busy he doesn’t have much time to think about anything else. His son Bam Bam pops in to show him some pictures of the house he is thinking about buying. He also asks Freddy to guarantee his loan from the bank. Bam Bam has caught Freddy right in the middle of fixing the motor bike so Freddy agrees and then tells Bam Bam he must get back to his work.
Pebbles calls in later to check up on her dad and bring him some lunch as she knows how busy he is. As they sit in the sun enjoying their lunch, Freddy fills Pebbles in on her brother’s house purchase and that he is going to guarantee the loan.
“Giving a guarantee is a big responsibility” Pebbles tells Freddy.
“It is?” Freddy questions. “I just wanted to help Bam Bam buy his house”.
“If Bam Bam doesn’t make his payments then you could be liable to repay the loan in full (including all related costs).”
“I hadn’t thought about that,” ponders Freddy.
“There are three important things to be aware of when signing guarantees” Pebbles explains.
“The bank will likely request an unlimited guarantee. If you enter into an unlimited guarantee you could be liable for all lending including existing personal loans, credit card debt and future lending that you may not be aware of. You may like to see if a limited guarantee will be sufficient for the banks security as this way your liability is limited to an agreed amount.”
“When you enter into a guarantee, the liability is joint and several. This means that you are both individually liable for the whole amount of the guarantee, as well as being jointly liable”.
“Hold on a minute Pebbles - you have got me confused” says Freddy.
“The bank is not required to seek equal contributions from both the borrower and the guarantor, if the borrower is unable to keep up with repayments and the bank can’t contact them, the bank may come directly to you for payment,” explains Pebbles.
“The last thing to be aware of is that guarantees are continuing, that means it remains in place until the bank agrees for it to be released. This would usually be either when the loan is repaid, or the bank is satisfied that there is enough equity in the home that the guarantee may be released.”
“Crikey” exclaims Freddy feeling quite overwhelmed. “I am going to have to give this guarantee business some more thought”.
“But right now I must get back to the farm!!”