The use of an instrument such as a credit guarantee can have several positive moments with your potential loan. Banks are making extensive use of this instrument and are supporting a situation where a potential borrower is prepared to guarantee his solvency, not only through an income statement but also through a credit guarantee. In this article, we will also talk about the legal consequences for a potential guarantor when signing such a contract, who can participate in a consumer credit guarantee, and the concept of a co-borrower.
What are the benefits of using a loan guarantee instrument? There are two main advantages:
- the bank may grant you a loan that would not have been granted in the absence of such guarantee;
- you will be able to get a loan on much more favorable terms (both higher amount and reduced interest rate because you are considered a more reliable borrower).
On the credit guarantee from the point of view of the law
A credit guarantee means that, in addition to the principal borrower, another person (or several persons) is responsible for the timely fulfillment of the credit agreement, and the guarantor does not participate in the direct repayment of the principal and interest; fulfillment of credit obligations.
The contract, which stipulates all the terms of the guarantee, must be concluded in writing. In addition, it is common practice that if the borrower fails to meet his credit obligation, he and the guarantor are jointly and severally liable for the performance of the contract (meaning that all the funds can be fully recovered from one of the parties). It must be understood that credit guarantee (or car leasing) is a serious matter . Usually, if a borrower defaults, the bank will go to court.
The defendants in this application are both the borrower and all guarantors. The court will collect the money from all the defendants jointly and severally, that is, you, as guarantor, can write off all the money individually. Of course, banks often offer so-called subsidiary borrower and guarantor liability. But this happens extremely rarely, and the result, if the borrower is not able to repay the loan, will be the same. In the case of subsidiary liability, the bank first applies for a claim against the borrower and, in the event of the borrower’s insolvency, recourse to the members of the credit guarantee and recover funds from them.
Here is another aspect that the guarantor must take into account: with regard to the extent to which he has extinguished the debt of the principal borrower, the guarantor also passes the right to the property to be credited (for example, an apartment or car part). The credit guarantee also provides the guarantor with an opportunity to lodge a claim (in addition to the value of the property) against the guarantor.
The credit guarantee may be waived. This usually happens in the following cases:
- If the borrower has extinguished his credit before maturity.
- If the bank has unilaterally changed the loan servicing conditions with negative consequences for the guarantor (for example, increased interest rate).
- If the debt is for any reason written to another person with whom the guarantor has nothing to do.
- Finally, the creditor may unilaterally waive the guarantor’s services.
Consequences of a credit guarantee
As we wrote above, the credit guarantee comes with two major benefits. A closer look at them will give you the following picture. If you use a loan guarantee instrument, banks can increase (!) The amount of credit several times! Typically, such an increase is made possible by the bank’s assurance of the guarantor’s solvency.
It is common practice for the guarantor to be required to produce the same documents (proof of income, existing properties, etc.) as required by the principal borrower. Also, be aware that the bank checks your guarantor’s credit history just like yours. If you and your guarantor have a positive credit history and you are solvent, you can expect to get the maximum amount with minimal interest.
Credit Guarantee and Co-Borrowers – Where’s the Difference?
Recently, banks have preferred to use co-borrowers as collateral for additional credit. This is due to the fact that it is easier to prosecute a co-borrower and recover his assets. The practice of using a co-borrower is simple: when the borrower himself lacks the reputation to get the amount he needs, the co-borrower helps fill that gap by providing an additional guarantee on the credit available with his income.
In addition, unlike the guarantor, the co-borrower undertakes exactly the same credit obligation. In the event that the main borrower has ceased to pay, the obligation to pay the credit obligation automatically passes to the co-borrower. The bank does not even need to go to court. The most important thing to remember when using a credit guarantee is that it is a serious responsibility. At the same time, if you are ready to take such a step, or if you have such friends, then take this opportunity to get a loan on much better terms!