I have agreed to guarantee a loan, so why has the Bank sent me to a lawyer?

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In short, the Bank has sent you to a lawyer to cover its own butt.

In certain circumstances the Bank is put on notice and taken to have presumed that the guarantor has been unduly influenced by the borrower to give a guarantee. As a result, the Bank will be unable to enforce the guarantee. That is, unless before taking the guarantee it had taken steps to ensure the guarantee had not been given as a result of undue influence. Those “steps” include sending you, the guarantor, to a lawyer for independent legal advice.

By doing this, the Bank passes the responsibility of explaining the transaction and potential liability on to the lawyer. For the Bank’s protection it requires written confirmation that the lawyer has fully explained to the guarantor the nature of the documents and the practical implications they will have for the guarantor. If it is ever necessary, the bank will rely on the lawyer’s involvement to counter any suggestion that the guarantor was unduly influenced or had not properly understood the transaction. Therefore, once transaction is entered into the guarantor cannot dispute the fact that he or she is legally bound by the documents.

Getting advice from a lawyer is not a mere formality. The risks involved in guaranteeing a loan are serious. For example, the guarantor could lose his or her home if the borrower does not meet its obligations under the loan, and if the home does not cover the amount owed then the guarantor could be made bankrupt. Once you have considered the risks, you have a choice whether or not to enter into the transaction.

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