Many people resign from applying for a loan at the bank, claiming that they do not have sufficient creditworthiness. Yes, the bank lending process is more demanding and time-consuming than applying for a loan from a non-bank institution, but thanks to that we can count on much more favorable conditions, and thus a lower price. Therefore, before we give up bank financing so quickly, we should carefully analyze our creditworthiness, and check what options we have to effectively increase it. As our experience shows, many people not only do not know what to do to improve their image in the eyes of the bank, and even do not realize that it is possible at all. In this article, we would like to present one of the most effective ways to increase creditworthiness, which is the loan guarantor.
What is a loan guarantee
Before we tell who and how can become a loan guarantor, and thus help to increase our creditworthiness, we will answer the question what a loan guarantee is.
The legislator himself comes to our aid. In accordance with art. 876 of the Civil Code , through a surety agreement, the guarantor undertakes to the creditor to perform the obligation in the event that the debtor does not perform the obligation. The guarantor’s declaration should be made in writing or otherwise it is null and void. More colloquially, a surety is a third party’s obligation to settle an obligation in exchange for a debtor at the time of his insolvency. It is concluded in the form of a separate agreement between the bank and the guarantor.
Loan guarantor and bank benefits
From the bank’s perspective, the guarantor of the loan is primarily additional security. In a standard situation, when we are only liable for the liability, in the event of loss of income source, we also have nothing to pay off our debts with. When entering into the loan agreement, the loan guarantor was added as collateral, when the source of income was lost and the installments were stopped, the bank “reaches into the pocket” of the loan guarantor.
When, for some reason, the debtor does not repay the installments in full or has ceased repayment at all, the bank, in the event of the inability to collect the debt from the debtor’s assets, asks the guarantor. IMPORTANT! When deciding on a loan surety, you should also remember about your rights. One of them is to ensure that the surety agreement is structured in such a way that before the bank reaches our assets it will be required to use all possibilities to collect debts from the borrower, including establishing a mortgage on the borrower’s property. The bank has the right to apply to the loan guarantor for repayment of installments in full for the debtor who fails to comply with the contract. What’s more, the guarantor of the loan obliged to repay the amount in full, is also required to repay interest on late repayment.
IMPORTANT! When establishing a surety, it is worth including a provision regarding the obligation for the bank to inform the guarantor of the fact that the debtor avoids paying off installments and, despite contacting him, is still in arrears with repayment. It is also good to determine to what extent the loan guarantor is responsible for the debt – if we do not, we are responsible for the entire debt, including interest.
Therefore, it can be said that the bank has double security for repayment of liabilities incurred. It significantly reduces the risk of lending, because it has not only one person but as many as two from whom he can demand repayment of receivables.
How does the loan guarantor affect our credit standing
In turn, for a potential borrower, adding a loan guarantor to a loan means a significant increase in creditworthiness, which means also a better chance of obtaining financing from a bank, as well as obtaining much better credit terms. Thanks to the loan guarantor, people who have not had the chance to obtain financing in a bank so far, due to insufficient creditworthiness, can apply for a bank loan.
Collateral on third-party income is also an opportunity to apply for much larger amounts. For example, let us recall a well-known loan for an apartment , which is often decided jointly by the spouses or partners. At such a time, creditworthiness is the financial situation of not one, but two people. Creditworthiness determined on the basis of revenues and expenses of two people will, as a rule, be much more favorable, and thus will allow you to apply for significantly higher loan amounts. Two people are also responsible for repayment, which means that the bank’s credit risk is much lower. When two people are applying for funding, it is not only easier to get a positive bank decision but you can also apply for a much higher commitment. Thus, a loan with a guarantor will work the same, which increases not only our chances of getting financing but also for much higher loan amounts.
Appropriate security is also an opportunity to negotiate a better price. Not one person claims that loans are expensive. However, the bank aims to monetize its products, so it’s not surprising. In addition, the bank also looks at the customer from a longer perspective. He wants to keep the client. This means that, in addition to the general loan conditions, each financing is individually tailored to the borrower. Thus, a number of factors influence the final price of the loan. When we decide to take advantage of insurance, add another product from the offer to the loan or establish additional collateral in the form of loan guarantee, we can count on the reduction of the financing price.
Who can be a loan guarantor?
As we indicated at the beginning, the loan guarantor is obliged to repay the debt in a situation when the bank is unable to collect the debt from the borrower. When deciding on a loan surety, we must be aware of the obligation we have. We will not feel it at all until the borrower repays the debt on time. However, if the installments are not repaid and the borrower cannot recover the debt, the loan guarantor becomes the debtor for the bank, from which he will demand the settlement of the debt with interest due.
One may be tempted to declare that anyone who could apply for a loan in a bank can become a loan guarantor. It can be a member of our family, friend or acquaintance. However, the loan guarantor can also be a completely stranger who gives his consent. The most important are income and sufficiently high creditworthiness to make a commitment.
The question of who can be a loan guarantor is one thing. The most important, however, is the awareness of what this involves and whether we really want to take responsibility on our shoulders. A loan with a surety is an invaluable help and advantage for the borrower. We can apply for a loan for which we would not have a chance alone. In the case of a loan guarantor, this is only a liability and not a small one that can often cause many problems. What’s more, it reduces creditworthiness. The loan guarantee is treated as a normal loan obligation, even though we are not actually a party to the loan agreement.
What documents do you need to collect?
A loan agreement with a surety is an obligation to collect all necessary documents that are required in a given establishment when granting a given type of obligations. The only difference in this case will be the type of security, and thus the establishment of a loan guarantor.
The loan guarantor is obliged to sign a contract with the bank, in which he agrees to repay the liability when the borrower does not. Just like the definition of a surety, all regulations related to it are also regulated by the Civil Code.
When deciding on the loan surety, we also decide to undergo the standard pre-loan verification. Although we are not a party to the loan agreement but only a guarantor, our credit standing, i.e. financial standing and credit history, will also be verified. The bank must be sure that the collateral will be effective and the loan guarantor will be able to repay the liability when the borrower shakes away. This means that the guarantor of the loan will also have to present to the bank all documents necessary for the lending process, such as a certificate of employment and income or information on currently repaid liabilities.
Can the loan guarantor get his money back?
Yes, there is such a chance. The loan guarantor can get his money back, but this is not a straight line. First of all, it should start with the fact that this does not release the guarantor from the obligation to repay the debt.
At this point, the subject of our interest will be a recourse claim, also known as repayable benefit. It involves applying for a refund of funds placed on behalf of another person to pay off their debts. To be able to do this, it is unequivocal with the fact that before we had to cover someone’s commitment.
Credit surety, which is often supposed to be a mere formality, in practice turns out to be a source of not small problems. Who would want to pay back his debt? Before you decide to become a loan guarantor, think several times whether the person whose loan you want to guarantee is trustworthy. Remember also about your rights and make sure that the loan guarantee agreement is the most beneficial for you.