Guarantee of payment of loan

Guarantee of payment of loan

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This document is a guarantee of payment of a loan by a third party in favour of a lender.

Guarantees

It is common for banks and finance companies to require borrowers to provide security to secure a loan. This ensures that should the borrower fail to repay the loan in full or in part, the lender can realise the security and mitigate any risk of non-repayment. In certain instances, it is prudent for lenders not associated with banks or finance companies to require borrowers to provide security for loans provided.

The most common securities provided in Australia are:

  • an interest in real property;
  • personal property; or
  • guarantees provided by third parties.

Contracts of guarantee

A contract of guarantee is, subject to any qualifications contained in a particular contract, a collateral contract to answer for the debt, default or miscarriage of another who is, or is contemplated to be or become, liable to the person to whom the guarantee is given.

One of the most common circumstances in which guarantees are provided is where a person borrows money from a bank. Before agreeing to loan money to the debtor, the creditor in many circumstances not only requires security from the debtor in the form of, for example, a mortgage on real property or a personal property security interest, but also requires a third party to guarantee the loan. In that case, if the debtor defaults on the loan, the creditor will be able to seek performance of the debtor’s obligations from the guarantor.

Legal advice

If the guarantor is a natural person, the beneficiary may wish to require the guarantor to sign a solicitor's certificate of independent advice before the guarantor executes the guarantee. A separate certificate should be obtained for each guarantor.

Consumer legislation

Practitioners should note that there are provisions in this agreement that do not comply with the National Consumer Credit Protection Act 2009 (Cth) and the Competition and Consumer Act 2010 (Cth) and which could be subject to a review under the Contracts Review Act 1980 (NSW).

Related precedents

  • Basic loan agreement
  • General security deed
  • Amendment and restatement agreement
  • Deed of priority
  • Real property mortgage
  • Forbearance of debt agreement
  • Deed of assignment of debt
  • Loan agreement checklist

This document has been authored for Lexis Nexis by Elise Margow, Principal, Legally Speaking.

This document is prepared with the assistance of Specialist Editors Geoff Geha, Partner, Clayton Utz and Karen Lee, Principal and Consultant, Legal Know-How.