A personal guarantee is given by an individual to a lender promising to pay the loan of another if there is a default. To obtain a business loan it is commonly required that the owner of the business guarantee the repayment of the loan. If there is a default in the guaranteed loan, the lender generally would have the right to seek payment by the guarantor even if the lender did not exhaust all methods of collecting from the borrower. If the guarantor pays the lender pursuant to the guarantee the guarantor generally would have the right to seek damages from the borrower.
Personal guarantees are very important in a falling economy.
- First, there are more defaults.
- Second, when there are defaults and the value of the collateral sinks below the amount owed, lenders are going to look to collect on the personal guarantees.