In this post, we will go through relevant concepts that are important to understand if you are considering a loan with a guarantor.
Guarantor loans are a type of loan where a third party guarantees the loan. It is a type of loan where the lender protects itself against the borrower's inability to repay the loan.
The guarantee is intended to ensure that the loan can be repaid in the event that the borrower is unable to do so.
A guarantor is a natural or legal person who guarantees another person's debt to a creditor. The guarantor guarantees that if the borrower cannot meet his or her obligations, the guarantor will step into the borrower's shoes and take over the obligation.
A loan with a guarantor can best be described with an example:
A borrows DKK 1 million from B. The loan is set up with C as guarantor. A gets into financial difficulties and is therefore unable to meet its obligation to repay B. As C is the guarantor, C will step into A's shoes and assume the obligation to pay B. C can then claim payment from A.
There are many constellations when taking out a loan with a guarantor, but often the guarantor (C) will be the parent of the borrower (A) who takes out a home loan with a bank (B).
Pro rata comes from Latin and means 'according to the corresponding part'. If you provide a guarantee with pro rata liability, it means that you guarantee a certain part of a total debt. If a loan amounts to DKK 1 million and four people are liable pro rata, their individual debt will be DKK 250,000.
The lender will therefore only be able to claim DKK 250 000 from each person. It is therefore irrelevant to a guarantor whether another guarantor is unable to repay his or her share of the loan - if a pro rata guarantee is given, the guarantor is only responsible for his or her own share.
Pro rata liability is different from joint and several liability. If joint and several liability had been agreed in this example, the lender would be able to claim the full amount, i.e. one million Danish kroner, from each of the four guarantors. They would then have recourse against each other and would be able to claim repayment of the amount.
Self-bonding is the most stringent form of surety. It is often used by banks and other professional lenders. Under a self-bond, the guarantor is liable from the day the borrower fails to pay on time. This means that the lender can only require the guarantor to pay if one payment is not made on time.
Unless otherwise agreed or provided by law, the simple guarantee is the general rule in Danish bail law. If a loan is established with a simple guarantee, the lender must be able to prove that the borrower is unable to pay before the guarantor takes over the debt. This is proved by an attachment or bankruptcy.
A letter of guarantee is a declaration that any debt the borrower has or will have in the future towards the lender is guaranteed. This type of guarantee can have major consequences, as the guarantor is liable not only for a specific amount, but also for any future debts the borrower may incur.
It is relevant for the borrower as well as the guarantor to know all the details of the loan. This includes the principal amount and the cost of setting up the loan, but also the interest and fees that will be charged. Interest and fees can be a heavy financial burden for a long period of time, for example if the loan ends up being repaid through an installment plan.
If the bank requires it, you may need to find a guarantor. If you do not have a guarantor, you will have to look among your friends or family for someone who is financially sound and confident that you will be able to repay. It should be stressed, however, that there may be challenges in your relationship if you end up not being able to meet your obligations.
There are several situations where it may be appropriate to take out a loan with a guarantor.
Both private individuals and companies can act as guarantors for others. However, it is usually private individuals who act as guarantors for other private individuals. There are a number of requirements for the guarantor that are necessary before the person can be approved as a guarantor.
It is also possible to have more than one guarantor for your loan, provided they also meet the above requirements. For example, two family members who want to spread the risk.
There are advantages and disadvantages to being a guarantor - but mainly disadvantages. Probably the only advantage is that you can help a friend or family member get the loan they want, often for a house.
However, the disadvantages are many. It can be a heavy burden for the guarantor if the borrower is unable to repay the debt, as the guarantor will take over the obligation. In the case of an absolute guarantee, the consequences may be even more far-reaching than with other forms of guarantee, as the debt may grow even larger.
It is advisable to consult an adviser if you are thinking of becoming a guarantor. This will give you a full understanding of the risks involved in guaranteeing someone else's loan.
If you want to take out a loan but your finances cannot bear it, a guarantor is an option. However, there are a number of advantages and disadvantages you should be aware of.
Depending on the type of guarantee, different things happen when a borrower is unable to pay on time and thus defaults on his or her obligations.
If the default occurs in the case of a loan secured by a self-bond, the guarantor takes over the obligation immediately when the obligation is defaulted. In this case, the lender does not have to prove that the borrower is insolvent, but can simply claim the money directly from the guarantor.
In the case of a default on a loan secured by a simple guarantee, the lender - typically a bank - must first obtain evidence that the borrower is unable to pay.
If several parties are jointly and severally liable for a loan, the bank can demand repayment of the debt from one or more of the parties. This may mean that the bank will go after the party that they know can repay the debt. Although this party is then stuck with the debt, it could be said that the party is simply 'putting out' for the other parties who are unable to pay. The paying party can then exercise its right of recourse.
Recourse means that a guarantor who has guaranteed a loan can require the borrower to repay the amount. If the borrower defaults on his obligations, the guarantor takes the place of the borrower. However, the guarantor does not necessarily suffer a loss.
The guarantor has recourse against the borrower, thus creating a new creditor-debtor relationship where the guarantor is the creditor and the borrower the debtor. The parties can then agree between themselves how the amount guaranteed is to be repaid. In practice, however, it can be difficult for the guarantor to get his money back as the debtor is often insolvent.
It should first be stressed that in most cases a guarantor is needed because the borrower's finances are not solid enough to support the loan. In other words, the bank considers that the borrower's finances are not good enough for the loan and additional security is needed. There is therefore a risk that the borrower will not be able to repay the loan.
Before guaranteeing a loan, it is therefore important to consider several things.
There are ways to increase your security as a guarantor. For example, you can include in the guarantee statement that the borrower himself or herself guarantees the debt.
It is important to consider all the potential consequences of acting as guarantor for a borrower who is unable to repay the debt. However, it must be said that in most cases, the borrower meets his or her obligations and all parties are happy. However, it is recommended that you consult a lawyer to ensure that you are as well protected as possible.
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