A guarantee is one of the ways to ensure the fulfillment of obligations, in this case, obligations under a loan agreement.
A suretyship agreement is concluded between the guarantor and the borrower or creditor, under which the guarantor commits him-/herself to the creditor of another person to be responsible for the latter to fulfill his/her obligations in whole or in part.
In case of non-performance or improper performance by the debtor of the obligation secured by the surety, the guarantor and the debtor shall be jointly and severally liable to the creditor if the guarantor does not provide for subsidiary liability.
It is very important to keep in mind that the guarantor is responsible to the creditor to the same extent as the debtor, while the creditor chooses to whom to present the claims to the debtor or guarantor.
The most common requirements for a guarantor candidate:
- age at least 18+ years and not older than 65 years;
- a proof of stable high income;
- good credit history.
Many people suffered as a result of a lack of understanding of the essence of the contract of guarantee, did not give it due importance, as a result of which they were forced to answer for the debts of their friends. And although the creditor’s rights are transferred to the guarantor who has fulfilled the obligation for the debtor, for obvious reasons it is far from always possible to recover something from the debtor.
Loan guarantor: how not to spoil your life with other people’s debts
What is the risk of the loan guarantee? Why is it dangerous to become a guarantor and is it possible to avoid problems if the borrower stops paying?
Why mess with other people’s debts?
A guarantor is a person who is obliged to return to the creditor (the bank) all or part of the debtor’s funds – if he or she suddenly failed to fulfill the obligations assigned to him or her by the loan agreement. The conditions are fixed by the contract of guarantee.
Of course, this is the risk and danger – the guarantor is responsible to the lender in the same range and size as the borrower. If the borrower proves to be insolvent or not serious, then the bank has the right to file a claim with both the borrower and the guarantor.
The presence of a loan guarantor is beneficial only to banks. Thus, they want to protect themselves from non-repayment of the loan, that is, to minimize their risks. In this case, the guarantor will be obliged to pay the lender not only the loan amount but also interest, as well as reimburse legal costs for the recovery of debt and other losses of the lender. If there are several guarantors, they are jointly and severally liable to the creditor.
Most often, a guarantee is required for long-term targeted, as well as medium and large loans in a large amount (for example, when applying for a mortgage).
If you are asked to become a guarantor
Your friend takes a loan to start a business and asks you to become a guarantor. Think carefully: are you ready to pay someone else’s debt? Have you already become a guarantor for a friend who took a mortgage, and then lost his job and cannot pay? Get ready to do it for him or her. And if you refuse, you will lose your property.
Usually close relatives or close friends become loan guarantors. But should you agree to this?
They say you should not lend to close friends. Same story for the guarantee. If you do not want to spoil the relationship – it is better not to become a guarantor. Of course, when it comes to close family relationships, children and parents, this is a different matter.
In business, people usually take money for this. This is a service, like a bank guarantee or insurance. But our mentality does not allow taking money from loved ones – although they carry huge risks. And one could say: “All right, half a percent a year – and I agree”.
The problem is that the bank agreement indicates specific conditions of guarantee – which means that it is then useless to challenge them in court. And the contract may also indicate a penalty in addition to all payments to the guarantor.
If you still decide to become a loan guarantor
It does not mean at all that your relative or friend will go bankrupt, lose his/her job or turn out to be a scammer and hide in an unknown direction. Therefore, people hope for the best and search for a guarantee.
If you also decide to become a guarantor, carefully weigh the pros and cons. It is very important to know all the information about the loan: the amount, interest, terms. It is also important to know everything about the borrower – income, address, marital status.
It is necessary to see that the borrower has a constant source of income or property, a pension or a good job that he or she would be afraid to lose.
Be sure to keep all loan documents, and after its repayment you will receive a conformation from the bank.
Weigh your financial resources in case you have to repay the loan.
In an extreme case, you, as a guarantor, can protect yourself under a loan agreement – this is allowed by law. For example, you can insure yourself for a certain amount. You can also limit the guarantee by time – to stipulate the period during which you are ready to bear responsibility. There is an option to agree with the borrower that he or she does not sell valuables, does not go abroad for a certain time, and does not take third-party loans. In addition, you can require the loan recipient to regularly report on his or her income and expenses.
Does the guarantor have any rights?
If you had to pay the debt for the borrower, you can sue him or her from you funds – all losses incurred, including interest. However, such an opportunity will appear only when the you fully repay the loan.
You can terminate the guarantee if there have been changes to the contract that the guarantor was not warned about.
In case of a significant change in the terms of the contract without informing the guarantor, the obligation is considered terminated. By law, the debtor and creditor must obtain consent to change the primary obligation. But these are rather exceptional cases. And the only way to avoid problems is not to become a guarantor at all.
You can become a guarantor in three cases.
- The amount of someone else’s loan does not scare you at all. It’s a penny for your budget. Losing a friend is much worse;
- This is your close relative who you share a budget with. For example, a wife or son. In this situation, it doesn’t matter at all which of you will become the borrower and which of you will be the guarantor;
- You can help a friend if you are firmly convinced that he or she will be able to repay a loan under any circumstances. And you get a bonus – strengthen your friendship.