What is a guarantee?
If a prospective customer cannot provide sufficient collateral, the alternative can be that a suitable person guarantees the repayment of the loan. The latter signs the surety agreement and can therefore be used by the bank or the borrower if the actual borrower can no longer or does not want to meet his payment obligations.
This usually requires a joint and several guaranty with no objection. In contrast to the default guarantee, the joint and several guarantee goes much further: the bank can not only approach the guarantor in the last instance after lengthy and costly processing and enforcement against the borrower, but can use it on an equal footing to repay the loan. The waiver of objections means that the guarantor cannot rely on the usual objections (such as limitation) that are available to the borrower.
According to § 766 BGB, three key form features must be included in the guarantee contract or form:
- exact name of the creditor
- concrete naming of the principal debt (maximum amount guarantee, plus interest and ancillary credit costs)
- a written and unequivocal statement from the guarantor
Furthermore, fees (so-called guarantee fees ) are generally due for the guarantee. This is intended to compensate for the increased administrative expenses for assuming the credit risk. The guarantee fees vary from bank to bank and are usually based on the principal debt. In practice, an order of magnitude of 1 percent (i.e. around 10 USD per 1,000 USD) is common.
It should not be forgotten that the guarantor is not a main debtor and should only be available in an emergency. This means that the borrower must be able to service the loan from their own resources. As a result, unemployed people or Hartz IV recipients, for example, have no chance of obtaining a loan despite potential bank guarantees. On the other hand, many banks grant a loan to employees during the probationary period if they have a suitable guarantor.
What do I need to guarantee a loan?
A suitable guarantor must generally be creditworthy himself. In addition to the age of majority, this means above all a very good credit rating, for which three important requirements must be met:
- perfect Credit Bureau information
- fixed attachable income
- regulated financial situation
What if the guarantor is already a borrower?
The guarantor can already pay off one or more loans himself – if his bottom line disposable income and collateral are sufficient to settle the principal borrower’s debt if the guarantor uses the guarantor. The rule by which banks judge this is that the guarantor could pay off at least a quarter of the loan within five years.
Apart from the pure numbers, a guarantee and its possible consequences should be carefully considered. Is the loan and its repayment understandable by the borrower or are there already doubts? What happens if the principal is unable to service the loan due to unforeseeable events? Do you assess them so responsibly that they do not take advantage of their guarantors, but can and will help themselves if necessary? Ultimately, it’s also about trust.
Which guarantees are ineffective or immoral and prohibited?
In order to protect the guarantor and the borrower from over-indebtedness, there are some legal requirements for taking out a loan with a guarantor:
- Particularly extensive agreements in the loan agreement are not permitted. This applies above all to global guarantees for unspecified or unknown and future claims.
- If the consequences of liability are downplayed towards the guarantor or the contract is reduced to a formal form, the guarantee is ineffective. In particular, unsecured guarantors should be protected from deception. Unfortunately, the burden of proof lies with the guarantor himself.
- In principle, spouses or close relatives can be used as guarantors – but they must not be financially overwhelmed by the guarantee and must have sufficient income and assets to be able to pay off at least a quarter of the loan with their own funds in five years. In addition, no emotional dependencies may be exploited.
In any case, a so-called guarantee on first request is also not advisable. A single default of payment by the main debtor is sufficient to be able to demand the installment immediately from the guarantor.
When does a guarantee expire?
A guarantee for a loan expires in the following cases:
- if the main claim has been paid in accordance with the contract or the guarantee has been used.
- for a temporary guarantee: when the period has expired
- in the event of waiver by the creditor
- after giving up a security interest (further security associated with the main claim) without the knowledge or consent of the guarantor (eg if a mortgage is assigned by the creditor); This is to prevent the guarantor from being disadvantaged. The BGH decided this on June 4, 2013 and released a guarantor from his obligation to pay.
- in the event of termination in accordance with the contract by the guarantor – this is practically impossible until the loan has been paid in full
On the other hand, the guarantee does not end when the guarantor dies, but is inherited.
Advantages and disadvantages of a guarantee loan
- Despite the lack of collateral, the borrower can receive an important loan.
- The bank can adequately hedge a loan transaction that is worthwhile for it.
- For the bank, tangible collateral is generally better, since the “value” of a guarantor can also deteriorate after a loan has been taken out.
- For the guarantor, the guarantee means a high financial and personal risk: If the main debtor cannot or does not want to service his loan, the guarantor is fully responsible in the worst case. This usually also affects the best personal relationship between borrower and guarantor to date.
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