Personal Loan Guarantee

From Open Risk Manual

Definition

Personal Loan Guarantee is a legal clause embedded in a Loan contract whereby the Borrower (typically a principal in a Private Company With Limited Liability) promises to repay funds borrowed for their business using also their personal assets.

Credit Risk

The presence of Collateral or personal guarantee strongly affects the mean of recovery rates, as shown by [1],[2],[3]

Issues and Challenges

SME lending is secured by real estate or a personal guarantee, banks have a strong incentive in the event of a loan default to enforce the guarantee or initiate foreclosure to realize the security and collect proceeds. Although individual debt restructuring may lead to higher total recovery value, the fixed cost associated with simultaneously restructuring a large number of distressed SMEs may exceed that of foreclosure, which may be cheaper, faster, and more certain, especially in cases where value of collateral pledged exceeds the loan value[4]

References

  1. Chalupka and Kopecsni (2009)
  2. Friedman and Sandow (2003)
  3. Grippa et al. (2005)
  4. Tackling Small and Medium Sized Enterprise Problem Loans in Europe, W. Bergthaler et al., 2015, IMF Staff Note

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