Does your brother / sister, your friend or your child ask you to be a guarantor for your loan? You intend to accept, of course. And yes, they are people close to you and also trustworthy. For you, there is no chance that they do not pay their debts. This commitment seems to be just a formality, an act to help get credit. Think again, stand surety is a real responsibility, a commitment with serious consequences. Do you really know what that entails?
What does it really mean to vouch for a loan?
When a person wishes to take out a loan, the banker can ask for a deposit. The latter will be intended to guarantee credit. If the borrower finds himself in a situation where he can not pay his debts, the surety comes to the rescue.
Who can vouch for a credit?
In principle, a person can decide to vouch for a loan that is unrelated to the borrower. This person must have the legal and intellectual capacity to be a surety; she must understand the scope of her commitment. It will also have to meet certain criteria: the bank will review the bond to see if the surety is able to repay the loan if the main borrower would be defective.
The person vouching for a loan signs a contract with the lender with all the details of the guarantee. She will therefore receive a copy of the credit agreement.
In principle, the contract of the guarantor is of a duration equivalent to that of the guaranteed main contract. If the credit agreement is of indefinite duration, the surety bond can not exceed 5 years (renewable period with the agreement of the guarantor).
The amount for which the bond guarantees a loan, can not exceed the loan amount plus interest. The total amount of interest to be paid by the surety can not be greater than 50% of the principal amount. The financial institution can not ask the guarantor for any additional cost or compensation.
What are the rights of the guarantor?
Engaging as a guarantor of a loan is a serious act of consequence. As a surety you have to be really and perfectly informed.
You have many rights:
- Before obtaining the credit: the lender must inform you about the duration of the commitment, the amount and provide you with a copy of the loan contract envisaged. The surety bond must be written and you must also write mandatory information.
- During the credit period: the lender must inform you of any changes that may be made to the contract. He must remind you every year that you have guaranteed a loan. The lender must warn you of the fees and interest that remain to be paid. The lender must also alert you to the borrower’s payment difficulties as well as the payment facilities that may be granted.
What are the different types of guarantees?
There are different ways to secure a loan:
- The simple deposit: for this type of bond, the creditor can not turn against the bond for the repayment of the debt until after having exhausted his recourse against the principal borrower. This means that the lender can not ask you to settle the debt for which you have vouched without first demanding it from the borrower.
- The surety bond: in this type of bond, you are jointly and severally liable, that is to say on the same basis as the main borrower. The creditor can claim the entire debt from one or the other. In particular, he may ask you to repay without having to prove that the principal debtor is insolvent.
- The limited deposit: in this case, you can limit the amount or duration of your guarantee.
- The mortgage surety: in this type of bond, people give as security a real estate to guarantee the repayment of the loan.
- The indivisible guarantor: in this case, different people decide to vouch for a loan. The banker reserves the right to claim the entire debt to any of the sureties.
Before you can be generous and offer credit guarantees, it is essential to assess your financial ability to repay a loan from a friend or family member.
Consequences of non-repayment of credit by the borrower
The consequences will depend on the type of guarantee you have signed. Generally, for the single deposit that is one of the most popular, one of these conditions must be met:
- The borrower has not settled at least two installments
- The borrower has not settled at least 20% of the total amount to be repaid
- The borrower did not pay 20% of the last installment
The lender must have put the borrower in default by registered letter, that is to say he had to order him to pay. If the borrower does not pay his debt, one month after sending the registered letter, the lender can turn against you.
Does the guarantor have protection?
Being a guarantor gives you the opportunity to be totally or partially exempted from your bond. To do this, you must prove that your commitment is disproportionate to your wealth or income. You can therefore ask the justice of the peace to discharge this act if the principal debtor is admitted to a collective debt settlement.
When settling the debt of the borrower, as a guarantor you have the option to turn against the borrower to claim your money. However, very often the latter is likely to be insolvent. This remains a delicate step to take.
You have to be certain of what you do when you stand as a guarantor for a car or other loan. Read the contract carefully and do not hesitate to study the compatibility of your financial situation with this deposit. Remember, being a guarantor can be a serious commitment that, in the most extreme case, can lead to a debt situation.
If your loved one still has not found the credit they need, do not hesitate to compare the financial institutions.