Personally guaranteeing a loan - what are the risks?

When offering a personal guarantee on lending – whether this is a business loan or guaranteeing a loan for a friend or family member – you need to be aware of what you’re getting yourself into and the risk you’re taking.

Offering a personal guarantee on a secured loan means you’re essentially promising to repay the loan if the business or person can't make the repayments. These repayments would come out of your own money or assets. While this might seem unlikely to occur, giving a personal guarantee can have serious consequences if the business or person is unable to repay the loan.

Here are some of the risks of giving a personal guarantee:

• Personal liability – by signing a personal guarantee for the loan, you're putting your own personal assets on the line. If your business or friend/family member defaults on the loan, the lender can come after your personal assets to collect the debt. This means your home, car, savings, and other personal assets are all fair game and could be at risk.
  
• Negative impact on credit score – if the lender comes after your personal assets, this can have a negative impact on your personal credit score. As a result, it could become more difficult for you to obtain credit in the future. Lenders will see you as a higher risk, which could affect your ability to borrow, take out a mortgage, or obtain personal finance in the future.
• Strained relationships – when you're asked to give a personal guarantee by a business partner or friend/family member, this can put a strain on your business and personal relationships. Having to repay the loan from your own assets can cause resentment, mistrust, and ongoing problems between you and that person. The relationship may break down altogether.
• Difficulty obtaining credit for your business – giving a personal guarantee for a loan may get the business out of a short-term financial hole. However, when a business relies on personal loans from directors, this can impact your ability to obtain credit for your business in the future. Lenders see this as a risk and may be less likely to extend credit.
• Risk of bankruptcy – if the business can’t repay the loan and the lender comes after your personal assets, this has the potential to push you into personal bankruptcy. Becoming bankrupt can have serious long-term consequences, including difficulty obtaining credit, loss of assets, and damage to your credit score.

Talk to us about your finance plans

If you’re thinking about taking out a loan, or becoming a guarantor for a loan, it’s important to know and weigh up the risks. Make sure you understand the risks involved, and that you have a plan in place for repaying the loan if the worst happens and you end up having to make the repayments yourself.

We can help you work out a strategy, as well as connect you with a suitable independent financial adviser or legal expert to explore the risks.