Taking out a loan is a serious financial step. While all lenders advise borrowers to seek independent legal advice before signing, some banks and other financial institutions will not proceed with a loan without evidence that you have obtained this advice.
Although it is not often acknowledged, acting as a guarantor for someone else’s loan is an even more serious financial undertaking.
All banks and lenders should require guarantors to seek independent legal advice before they enter such an arrangement.
In most cases in Victoria, banks and lenders will require you to produce an “Independent Advice Certificate” (also known as a “Borrowers Certificate” or “Solicitors Certificate”) to prove that you have received this advice.
This is simply a form that has been signed by a solicitor to confirm that the advice has been provided to the borrower or guarantor.
Requiring such a certificate effectively reduces the risk for the lender, who can point to this evidence if the borrower or guarantor later claims that they did not understand the risks of the contract that they were signing.
More than just a signature
The requirement for an Independent Advice Certificate is not just an administrative step requiring a solicitor to sign a piece of paper.
The borrower or guarantor is required to obtain independent legal advice and the Certificate is merely the evidence that this advice has been given.
The first step of this advice is a confirmation of identity. Even if the lender has already confirmed the identity of the borrower or guarantor, a solicitor must take very specific steps to ensure that the person presenting for the advice is the borrower or guarantor. These steps are enforced by the Legal Profession Uniform Legal Practice (Solicitors) Rules 2015 and cannot be waived by the solicitor.
Advice to Protect Borrower or Guarantor
A solicitor does not give every borrower or guarantor the same “form” advice. Rather, the solicitor will read the specific contract and provide tailored advice, based on the contract that is being signed, the security that is being offered, and the individual circumstances of the borrower or guarantor.
However, it is important to know that the solicitor will not provide any financial advice, such as about whether the contract is a good investment.
The solicitor will take steps to ensure that the person is entering into the contract willingly and is not being unduly pressured.
Guarantors are often vulnerable to influence or pressure, especially if they are the parents or spouse of the borrower.
Seeking a Solicitors Certificate is a chance to sit down and receive advice, and an opportunity to take a moment to really consider the consequences of making a serious financial undertaking.
The focus of the solicitor is to ensure that the person entering into the contract fully understands the risks and liabilities, including the potential for them to lose any attached security and even face personal bankruptcy.
It is common for borrowers and guarantors to not understand all of the consequences of signing a financial contract. For instance, guarantors often do not know that the lender does not need to pursue the original borrower for repayment before they demand that the guarantor repay the loan.