A surety is like a payment obligation if the borrower cannot pay the installments.
Do you think a loan guarantee is purely a formality, a friendship service, so to speak? This is far from the case. As soon as the person you guarantee with your signature does not pay an installment even once, the bank will contact you immediately and can enforce it if necessary.
If creditworthiness is poor, banks generally only grant a loan if a second person signs the loan agreement. The relationship between the borrower and this person is immaterial. It does not matter whether the guarantor is the spouse, another adult family member, a relative or a friend. Guarantors often sign the loan agreement without first thinking about the risk that a guarantee can entail.
For example, what happens if the borrower suddenly gets into a financial constraint and can no longer pay the installments? What if he loses his job or is seriously ill and is unable to work for a longer period of time? If he has no insurance to cover these contingencies, the installment payments will remain with you, because you are a guarantor as a second borrower.
The risks of a loan guarantee
A friendship can break up quickly with a guarantee.
As a guarantor, you are liable for the entire loan amount including interest. The credit guarantee is also communicated to credit, so that you now have a credit entry, even if you are not the borrower yourself. This can turn out to be a disadvantage for you faster than you think. At the latest when you want to take out a loan. The bank obtains credit information, sees that you have an entry as a guarantor and, depending on the creditworthiness, may say no to your application. Why it is like that? For banks, a guarantee counts like a loan. Even if you are not the borrower yourself, your guarantee is a risk for the banks. It could happen that the borrower can no longer pay the installments and you would ultimately have to take over the entire loan.
However, there is no risk for the bank if you can demonstrate sufficient security (eg high income, property ownership, life insurance, etc.).
The guarantee that you assume for a retail customer loan is the joint and several guarantee. With this type of guarantee, the credit institution will contact the guarantor directly if the borrower is unable to pay or is in arrears. If the borrower is unable to pay, the guarantor can be enforced immediately.
You should be aware of this before signing a loan guarantee
Before you stand in as a guarantor for a loan, you should be aware that your signature is not just a formality or a friendship service. You need to be aware that you will be liable for the entire loan amount, if any, during the entire term.
Your guarantee does not expire until the loan has been repaid in full. Also keep in mind that losing your job, illness, accident or divorce can cause you financial difficulties at any time.
Tip: If you still want to take on a loan guarantee, make sure that a right of termination is set when you conclude the contract. Only then can you withdraw from the guarantee during the term of the loan.