Loan and guarantee agreements: what to read first

The law on guarantees and mortgages was substantially reformed a decade ago to stop the practice of pushing the whole burden onto the guarantor. Many of the forms still passed around predate that reform. The result is lenders who believe they have more rights than the law gives them, and guarantors who believe they are liable for more than the law imposes.

On the lender's side, cases are lost most often not for want of evidence of the loan but because the interest charged exceeded the statutory ceiling, which destroys the interest agreement entirely. On the borrower's side, the worst damage comes from paying in full and never recovering the loan document, then being sued again on a debt already discharged.

What should you read first in a loan or guarantee?

• Whether the amount actually received matches the amount stated. The common practice is to deduct interest up front while writing the full sum into the document.
• The interest rate, against the statutory ceiling. A monthly rate must be multiplied by twelve before comparing.
• Default interest and how it is calculated, particularly where the loan is repayable by instalments; the amended law prescribes a method different from what older forms say.
• The due dates, and the events that accelerate the whole debt.
• The security, both guarantee and mortgage, which must state the maximum amount the guarantor is liable for and the period.
• Any clause making the guarantor liable as a joint debtor — amended by statute, yet still found in old forms.
• Return of the loan document on full repayment, which should be written in from the start.
• Collection costs and legal fees, and how they are calculated.

What does the wording actually mean?

• "The guarantor accepts liability as a joint debtor" has no effect where the guarantor is a natural person; the law makes it void.
• "The guarantor guarantees all present and future obligations without limit" does not bind. A guarantee of future obligations must state the purpose of the debt guaranteed, the nature of the obligation, the maximum amount guaranteed and the period during which the debt may be incurred.
• "The mortgagor accepts liability for any shortfall after the auction". A mortgagor who is not the debtor is liable only up to the value of the mortgaged property; an agreement beyond that is void.
• "Interest at three per cent per month" is thirty-six per cent a year, more than double the ceiling. The interest agreement fails entirely, and charging it is a criminal offence.
• "On default of any instalment, default interest runs on the whole outstanding principal". The amended law allows it only on the principal of the instalment in default.
• "The borrower acknowledges receipt of the full amount on the date of this agreement". If the money has not been received, do not sign: the acknowledgement can be used against the borrower in court.

What should a guarantor never sign?

• Signing a document with the amount, the rate or the date left blank.
• Guaranteeing without a maximum amount and without an end date.
• Handing over title documents together with an unfilled power of attorney.
• Using a sale with right of redemption, or a transfer of ownership, as security for a loan instead of a mortgage. Once the period passes the whole property is lost, however small the debt was against its value.
• Compound interest on a private loan, which is permitted only where interest has been in arrears for a year and the parties agree in writing.

How does the law protect a guarantor if the contract is silent?

• A loan of more than two thousand Baht is enforceable only where there is written evidence signed by the borrower.
• Proving repayment requires written evidence, the return of the loan document, or a cancellation endorsed on it. A bank transfer alone, without stating what it pays, is not enough.
• Interest on a private loan may not exceed fifteen per cent a year. Above that the interest agreement fails entirely and the lender may claim only the statutory rate from the date of default.
• Where no rate is agreed, interest runs at three per cent a year.
• Default interest is the statutory rate plus a further two per cent a year, unless the creditor is entitled to a higher rate on another ground.
• Where the debt is repayable by instalments, default interest runs only on the principal of the instalment in default.
• On the debtor's default the creditor must notify the guarantor in writing within sixty days. Notice given later releases the guarantor from interest and damages accruing after that period.
• An agreement making a guarantor who is a natural person liable as a joint debtor is void, as is one making the guarantor liable where the principal obligation is itself void.
• A disproportionate penalty may be reduced by the court.
• A claim under a loan agreement is generally subject to a ten-year period; where the principal is repayable by instalments it falls to five years.

Checklist: what to confirm before you sign

• Lenders: always put it in writing, state the amount in figures and words, and transfer the money through a bank account, keeping the record.
• Borrowers: confirm the amount actually received before signing, and never sign a document with blanks left in it.
• Pay every instalment through a bank account, stating which debt and which instalment it discharges.
• On final payment, recover the loan document, or have the lender endorse a cancellation on the original and sign it.
• Guarantors: ask for a copy of the principal agreement, and check that a maximum amount and a period are stated.
• Guarantors: give the creditor an address that reaches you, and update it on every move, so that notice arrives within the period.
• A mortgage must be registered with the competent official; a private mortgage document that is not registered is not a mortgage.
• Initial every page and keep a counterpart each.

This is the general position, not advice on your matter, and it is not a template to use on your own. Agreements made before the reform and after it are treated differently. Send what you hold for review before taking any step.