Personal guarantees

What is a personal guarantee?

A personal guarantee is a promise to a creditor, such as a bank or another lender, that you will pay if the principal debtor does not meet their obligation. The person making the promise is the guarantor.

A guarantee arrangement normally involves three parties:

• The creditor is entitled to receive payment.
• The principal debtor has the original payment obligation.
• The guarantor assumes responsibility under the guarantee.

A personal guarantee puts the guarantor’s own finances at risk. Depending on the agreement, the liability may cover the principal amount as well as interest, fees, and collection costs.

Simple guarantees and guarantees as for one’s own debt

The guarantor’s liability depends on the type of guarantee provided under Swedish law.

Simple guarantee

Under a simple guarantee, the guarantor generally becomes liable only after it has been established that the principal debtor cannot pay. The creditor must normally first attempt to recover payment from the principal debtor.

Guarantee as for one’s own debt

A guarantee “as for one’s own debt,” commonly referred to in Sweden as proprieborgen, gives the creditor a more direct right to payment. Once the debt is due, the creditor may demand payment directly from the guarantor without first attempting to collect from the principal debtor.

The agreement should clearly identify which type of guarantee applies.

Risks of providing a personal guarantee

A personal guarantee can have serious financial consequences. Before signing, the guarantor should understand both the underlying debt and the full extent of the personal liability.

The risks may include:

• having to pay the entire guaranteed debt
• liability for interest, fees, and collection costs
• a reduced ability to obtain personal loans or credit
• receiving a direct payment demand from the creditor
• being unable to recover the money from the principal debtor
• remaining liable longer than expected
• being required to pay the full debt even when there are several guarantors.

When several guarantors provide a guarantee without limiting their individual liability, they may be jointly and severally liable. The creditor may then demand the entire amount from one guarantor.

What should a guarantee agreement include?

A guarantee agreement should clearly identify the debt and the extent of the guarantor’s responsibility. It should normally address:

• the creditor, principal debtor, and guarantor
• the debt or obligation being secured
• the type of guarantee
• the maximum amount of the guarantor’s liability
• whether interest, fees, and other costs are included
• when the guarantee begins and ends
• what happens if the underlying loan is extended or amended
• how liability is divided between multiple guarantors
• how the guarantor will be informed about missed payments
• any collateral and other specific conditions.

An unlimited guarantee may cover more debt and additional costs than the guarantor expects. When possible, the liability should be limited to a stated amount, a specific debt, and a defined period.

Can a personal guarantee be terminated?

A guarantor generally cannot unilaterally end liability for an existing debt. Release from the guarantee usually requires the creditor’s approval, repayment of the debt, or replacement of the guarantee with other acceptable security.

An agreement may allow termination in relation to future credit or future use of an existing credit facility. Termination does not automatically eliminate responsibility for debt that has already arisen.

The guarantor should therefore determine how long the guarantee remains effective and what must happen for the liability to end before signing.

What happens if the guarantor has to pay?

A guarantor who pays the principal debtor’s obligation generally obtains a right to seek repayment from the principal debtor. This is known as a right of recourse.

A right of recourse does not guarantee that the guarantor will recover the money. If the principal debtor cannot pay, recovery may be difficult or impossible. The guarantor should therefore assess the principal debtor’s financial position before entering into the guarantee.

Personal guarantees for business loans

A bank or another lender may require a business owner to personally guarantee a company loan. The owner may then become personally liable if the company cannot make the required payments.

The agreement should clearly identify the credit covered, the maximum amount, and whether the guarantee applies to future credit or amendments to an existing loan. It should also address whether other security must be used before the creditor demands payment from the guarantor.

When to involve a lawyer

Legal assistance is recommended when the guarantee is unlimited, involves a significant amount, or contains complex terms relating to future credit, multiple guarantors, or other security.

A lawyer helps you understand the extent of the obligation and identify terms that may expose you to unexpected liability.