Loan with guarantor – what you should know
Sometimes things don't work out the way you think they will. You need money urgently, but your credit rating is not the best – with a guarantor it is possible that the bank will still give you a loan. Read what you should know and what your options are here.
What is a guarantor?
A guarantor is liable for the debts of another person. This means that the guarantor takes over the installment payment of a loan when the actual borrower cannot pay it. Therefore, a guarantor – similar to real estate or term life insurance, for example – is considered collateral for the bank.
To use a guarantor, the latter must sign a guarantee contract with the bank. The contract regulates when and to what extent the guarantor is liable in case of default of the actual borrower. In contrast to normal contracts, in which both signing parties have equal rights, a loan with guarantors is a one-sided transaction that only favors the bank. In principle, the guarantor does not receive anything in return for his signature. On the contrary, with his signature he exposes himself to a financial risk.
When do you need a loan with guarantor?
A loan with guarantor therefore ensures that even borrowers who do not have ideal conditions from the point of view of the bank, get a loan. These may be people with the following characteristics:
- Borrowers with poor financial credit ratings: if a borrower has a poor credit rating, banks struggle to lend to them. By the way, a bad credit rating does not only mean that one has a negative SCHUFA entry – the credit rating is composed of more complex factors. All it takes to get a negative credit rating is to have just started a new job, for example. Because a lot can happen during the probationary period and should you resign and be terminated during the probationary period, it is unclear to the bank whether you can continue to pay the loan installments. If the bank can fall back on a guarantor who will pay in the event of an emergency, it may turn a blind eye.
If you belong to one of these target groups, this does not automatically mean that the bank will certainly reject your application for an installment loan without a guarantor. Banks make their own lending decisions for the most part. This means that some banks have stricter, others less strict policy and criteria for granting credit. If you have a good credit rating or smaller loan amounts, you usually do not need a guarantor.
In addition to the aspect that a guarantor generally increases your credit score, a guarantor also ensures that you can get the loan at comparatively low interest rates, even with a poor credit rating.
Duties of a guarantor
There are four types of guarantees, each with different obligations on the part of the guarantor. They differ primarily in the timing at which the bank can approach the guarantor if the borrower defaults on payments. Therefore, it is very important to read the terms and conditions very carefully if you want to take out a loan with guarantors.
The default guarantee is probably the most frequently used variant of the loan with guarantor. In the case of a deficiency guarantee, the guarantor is the bank's last port of call if the borrower fails to pay his installments. Specifically, this means that an enforcement action has already been taken and was unsuccessful.
So the bank must clearly demonstrate that all attempts to get the money from the borrower himself have failed. Therefore, this option is probably the best for the guarantor.
Directly enforceable guarantee
One of the most popular forms of guarantee from the banks' point of view is probably the directly enforceable guarantee. In contrast to the deficiency guarantee, the bank does not have to prove that nothing is owed to the borrower. The insolvency of the borrower does not need to be confirmed thus with the selbstschuldnerische guarantee judicially by an unsuccessful execution procedure.
As soon as the borrower gets into payment difficulties, the bank can collect the outstanding installments from the guarantor. Nevertheless, it must be proven that there is a claim to the guarantor.
Surety on first demand
The bank gets its money even faster if a guarantee on first demand has been agreed upon. As soon as the installments are not paid by the borrower, the guarantor is obliged to pay; and immediately. With this type of guarantee, it is not even necessary for the bank to prove that the claim against the guarantor is justified.
If the claim turns out to be unfounded, the guarantor can only reclaim his money after payment has been made. The guarantee on first demand is therefore very risky for the guarantor. Unlike other types of guarantee, the guarantee on first demand is not regulated by the Civil Code. It comes about within the framework of freedom of contract.
Another type of guarantee is the global guarantee. In this case, the guarantor is not liable for a specific sum, but for all liabilities that the actual borrower enters into with a bank.
If, for example, the borrower has paid off his small loan in the amount of 3.000 euros settled and then takes another in the amount of 15.000 Euro as a car loan with the same bank, then with the global guarantee the guarantor would not only be responsible for the 3.000 euros, but also for 15.000 Euro and any other loan of the borrower with this bank.
As you can tell, when it comes to credit with guarantors, it depends a lot on what type of guarantee the contracting parties decide on. Because depending on which you choose, the financial risk borne by the guarantor is low or quite high. Therefore, it is highly advisable to inform yourself in advance very carefully. The bank will probably not inform you comprehensively on its own about the risks of the different types of guarantees, as it is only interested in ensuring that the loan is well secured.
For what amount is a guarantor liable?
How high the sum is, for which with a credit with guarantors one is liable, depends first of all naturally on how high the credit sum is. As a rule, the guarantor is liable for this amount. The guarantor should absolutely insist that he is only liable for the loan amount including interest and not for any additional costs or commissions that may be assessed.
Since a separate contract is always drawn up and signed for a loan with guarantors, the guarantor can also limit his liability. First of all, a concrete maximum amount should always be specified for which the guarantor assumes responsibility in the event of the borrower's inability to pay. It is also possible to agree on only a partial amount. Then, for example, the guarantor is only liable for 50 percent of the loan amount. In addition, you should make sure that the liability is limited in time for a loan with guarantors. Just because the guarantor is doing well at the time the loan is taken out, doesn't mean it will still be doing so in five or ten years' time.
If a guarantor cannot pay in the case of a guarantee, he is liable with his entire private assets. Even a private pension plan can be seized if nothing else has been agreed upon.
Especially important in a loan with guarantor is another contract between the borrower and the guarantor. In this, the repayment of the provided guarantee sum should be agreed upon and regulated.
A guarantee is entered in the respective SCHUFA information of the guarantor. Although this entry does not negatively affect the SCHUFA score of the guarantor. However, an entry alone can ensure that the guarantor is rejected by some banks if he himself needs a loan.
Who can become a guarantor?
In principle, anyone with a better credit rating than the actual borrower is suitable as a guarantor. In the case of a loan with a guarantor, it is important that the guarantor has a regular income and a good SCHUFA score. Since money matters are usually very personal and intimate, family members, spouses or close friends are often guarantors.
However, a guarantor should not allow himself to become a guarantor solely out of emotional attachment to the borrower. A loan with guarantors is about financial responsibility. You should urgently be aware of the following. A guarantee may not have ruinous features for the guarantor under any circumstances. He must really be able to pay the loan in case of emergency and thus should not be in over-indebtedness.
If a family member or spouse nevertheless agrees to provide a ruinous guaranty, it is considered immoral due to the close relationship between the borrower and the guarantor and is therefore invalid.
It is effective, however, when the guarantor benefits from the loan. If, for example, the spouse is guarantor for a loan from which the couple is buying a house together – i.e., construction financing – even a ruinous guaranty would be effective, since the guarantor profits from the loan just as much as the actual borrower does.
Furthermore, there is also the possibility to order two or more guarantors. In this case, the guarantors divide the guarantee amount between them.
Danger of confusion: Guarantor vs. second borrower
What is often confused is the guarantor and the second borrower. In the first moment this is not surprising at all, because in principle in each case someone is somehow liable for a loan with. But as the name suggests, the second borrower is directly involved in the loan and benefits from the loan amount. Second borrowers are common for loans with large sums, such as construction financing, where both spouses often take out the loan together. The second borrower is legally equal to the first borrower. Both borrowers are equally liable for the loan.
In the case of a loan with guarantors, the guarantor is not liable for the amount through the loan agreement, but through a separate agreement. In addition, he receives nothing in return for his guarantee and the risk it entails. In the case of a loan with guarantors, on the other hand, liability can be limited. This is not possible for the second borrower. It is always 100 percent liable.
When a guarantee expires
There are several scenarios when a loan with guarantors expires.
- The guarantee ends, for example, as soon as the borrower has repaid the installment loan in full. If the guarantor has signed a global guarantee, it is necessary to check whether the borrower has really paid off all the loans with the bank.
Think carefully about credit with guarantors
A loan with guarantor should not be taken lightly by both the potential guarantor and the borrower. Sure friends or family help each other in emergency situations, but the bank will have its reasons for not giving loans to certain people. Therefore, great trust between the guarantor and the borrower is essential. Because being a guarantor means having financial responsibility.
- Great financial responsibility for the guarantor
- Friendship is put to the test in an emergency
- Guarantor receives no consideration for risk he bears
- Guarantor is not contractually equal to the actual borrower
Both parties should urgently ask themselves whether they want to burden their relationship with each other in such a way. After all, the saying "money makes the friendship stop" unfortunately doesn't come from nowhere. In the worst case – if the guarantor has to pay – it is not uncommon for disputes or even a rupture to occur between the borrower and the guarantor. We therefore recommend that you check very carefully whether a loan with a guarantor is really your only chance or whether you only need a guarantor at this one bank; especially since guarantees tend to be the exception these days anyway.
The guidelines for granting loans vary in stringency from bank to bank. Comparing offers is worthwhile. Maybe you don't need a guarantor at all at another bank and still get a loan. Our specialists for installment loans have numerous well-known bank partners in their portfolio and will be happy to check whether you can get your desired loan from one of our partner banks without a guarantee.