Loan With Financed Property As Guarantee
A Loan with financed property as guarantee involves an agreement where a third party assumes some or all of the risk of a loan in case the borrower defaults. This is a common structure for real estate loans, including bridge and construction loans, as well as certain corporate and other commercial loan agreements.
In general, a guarantee requires a specific asset to back it (called collateral). The assets pledged range from real estate to equipment to accounts receivable or future credit card receipts. If you don’t pay back your loan, the lender can seize and sell the collateral to recoup its losses. This can have major consequences for you.
Different guarantees have different structures, including the amount of liability, repayment terms and other provisions. The type of structure used can have a significant impact on your personal exposure, so it is important to carefully evaluate all the options before choosing one.
The Structure of the Guarantee
Generally, the amount owed by a guarantor in the event of default is equal to or greater than the original loan principal. Some guarantee agreements also include associated expenses, such as legal and collection fees. Other guarantees are non-recourse, meaning the guarantor’s liability is limited to the value of the collateral that backs the loan.
When evaluating a guarantee, look for any language that could be interpreted in more than one way. Some contracts include “continuing” guarantee provisions that would make you personally responsible for all past, present and future loans with the lender.
…