What is a personal guarantee in a loan agreement?

A personal guarantee in a loan agreement specifically refers to a promise made by an individual, typically a business owner, to take on the responsibility for a business's debt in the event that the business is unable to meet its financial obligations and defaults on the loan. This means that if the business fails to repay the loan, the lender can pursue the individual’s personal assets to recover the owed amount.

This mechanism is often required by lenders, especially in small business loans, to provide an additional layer of security since businesses may not always have enough assets to back their debts. The personal guarantee effectively reduces the risk for the lender, as it provides a means to collect the debt from the guarantor should the business fail to fulfill its financial commitments.

The other options do not accurately describe a personal guarantee. For instance, while interest rates and collateral are significant components of a lending arrangement, they do not convey the same legal obligation that a personal guarantee does. The personal commitment element inherent in option A distinguishes it from agreements solely focused on loan terms or collateral arrangements.