What are the banking guarantees and what risks has a guarantor

Banking guarantees are important tools in the financial field, because it guarantees the fulfillment of contractual obligations between the parties. Find out below what it means to be a guarantor and what the risks associated with this commitment are.

What is a bank guarantee?

A bank guarantee represents an irrevocable commitment of a bank (called guarantor) to pay a sum of money to a beneficiary if his (authorizing official) does not respect his contractual obligations. This mechanism offers the beneficiary the safety that will receive the necessary financial compensation in the event of maintenance of the obligations by the authorizing official.

The role of the guarantor

The guarantor is the natural or legal person who undertakes to take responsibility for paying the debt if the main debtor does not fulfill his obligations. Basically, the guarantor acts as a safety mesh for the creditor, running the risk of non -payment from the debtor.

Types of guarantees

There are two main categories of guarantees:

Real guarantees

Involve tangible goods offered as a guarantee, such as:

• mortgage: real law on property properties (land, buildings) or mobile (equipment, vehicles) affected by an obligation;
• I COMMIT: Kingdom on the mobile property of the body (goods, equipment) or intangible (complaints, intellectual property rights), giving the creditor the right to capitalize these assets in the event of non -payment.

Personal guarantees

They are based on the commitment of a third party to take the debtor’s obligations in the event of non -payment. A common example is the trustee, in which the guarantor is required to pay the debt instead of the main debtor.

The risks associated with the role of guarantor

Assuming that the role of the guarantor involves a series of significant risks:

Direct financial risk

In the event that the main debtor does not honor its obligations, the guarantor is required to pay the remaining debt in full. This can seriously affect the financial stability of the guarantor, especially if the amount is considerable.

Impact on credit score

Failure to pay the debtor by the debtor and the inability of the guarantor to cover this debt can cause damage to the credit rating of the guarantor. Even delayed payments can be reported negatively, affecting the guarantor’s ability to obtain future funding.

Legal complications

The creditor can start legal actions against the guarantor to recover the amount due. This process may include forced execution, income or even the seizure of the guarantor’s personal goods.

Limit access to loans

Financial institutions can charge guarantee obligations as potential debts. Therefore, the guarantor’s ability to access new loans or loans in various currencies (she, euros, US dollars is limited).

Influence personal relationships

Guarantees are often offered in personal or commercial relationships. The failure to fulfill the obligations by the debtor can generate tensions and conflicts between the guarantor and the debtor, which affect interpersonal relationships.

How to minimize risks as guarantor

Here are the ways to protect you as a guarantor, in order to make a informed decision and reduce any negative consequences:

Understand exactly what it means to be a guarantor

Before signing any document, it is necessary to clearly understand the responsibilities and risks involved. As a guarantor, you oblige you to buy the debt if the debtor does not pay. This commitment can influence:

• your financial situation and personal assets;
• the credit score and the possibility of obtaining future loans;
• The relationship with the debtor, especially in the case of a financial conflict.

Read the contract carefully and request further explanations from the bank or a financial consultant before accepting the role of guarantor.

Evaluate the debtor’s payment capacity

Check the financial situation of the person or company for which you want to be a guarantor:

• the income and financial stability of the debtor;
• The debtor’s credit history – if it has had problems with the payment of debts in the past;
• the company plan (in the case of a guarantee for a company);
• Other existing debts.

Make sure to understand the contractual terms

Banks and financial institutions include various clauses in the guarantee contracts. Here are the aspects to be verified in detail:

• Guarantee type: see if you are a guarantor for the entire amount or just a part of the debt;
• Your rights and obligations: find out what is happening in case of non -payment;
• Period of validity: check if the guarantee is limited in time or remain responsible until full payment of the debt;
• Hidden clauses: see if there are penalties, hidden interests or other additional obligations.

Consult a lawyer specialized in bank contracts before signing.

Negotiate the condition of the guarantee

If you decide to be a guarantor, try negotiating the terms of the contract in order to better protect your interests. Here’s what you can negotiate, as a guarantor:

• limit the guaranteed amount: avoid being a guarantor for the entire debt;
• Establish a fixed period for the guarantee: it does not accept an unlimited term;
• Exclusion of extended liability clauses, sure of not being responsible for further interests or sanctions.

Take into consideration alternative guarantees

In case of doubts about the risks taken, you can offer alternatives to limit the exhibition:

• Real guarantees: if the debtor has activities (for example buildings, cars, equipment), it can use these goods as a guarantee instead of a personal guarantee;
• Bank guarantee letter: some banks offer solutions in which the financial institution guarantees the loan, thus reducing the pressure on you;
• Co-Custade: if possible, it proposes that the guarantee is divided between different people, thus reducing personal risk.

Monitor the debtor’s financial situation

After becoming a guarantor, do not ignore the debtor’s financial situation. Be constantly informed, to intervene quickly, if problems arise.

• Request periodic updates on the payments made;
• Check the bank extracts and the debt situation;
• In case of payment delays, discuss immediately with the debtor to find a solution.

If known financial difficulties, try to talk to the bank to renegotiate the debt or other solutions to avoid the execution of the guarantee. Financial planning is an important component in the correct management of resources in the long term.

Assuming that the role of the guarantor is a decision that must be evaluated with the utmost care. Although it may be an essential support for the debtor, the associated financial and personal risks are considerable. It is recommended that the potential guarantees analyze in detail the financial situation of the debtor, the terms of the contract and be aware of the long -term implications, before taking this responsibility.