Financing backed by guarantors: pros and cons of a security guarantee
Loan guarantees, also known as a Sicherheitsgeber in German, are a common practice in the world of finance. They refer to a legally binding contract where one person agrees to cover another's debts in case of default, thereby supporting the credit risk management for the lender.
In a loan with a guarantee, the guarantor should trust the borrower to meet their installment payment obligations. The surety remains obligated until the full repayment of the debt, which can take several years depending on the amount of the loan. A subsequent withdrawal is not usually possible.
A surety can increase the chances of obtaining a loan, particularly for online loans, small loans, or loans for apprentices. It can make a loan possible even with poor creditworthiness. This is because the surety offers the bank security, confirming to cover missed installments if the borrower faces payment difficulties.
However, being a guarantor for a loan comes with its own set of responsibilities and risks. A surety bears a great responsibility and the entire risk, and does not financially benefit from the surety. The potential strain on the private relationship between debtor and surety is another disadvantage.
To apply as a guarantor, a person needs to provide copies of ID, proof of income, a completed self-disclosure form, SCHUFA report, and a surety agreement. It is crucial to ensure that the guarantor meets the necessary requirements, such as being of full age, having permanent residence in Germany, owning income, a German checking account, and good creditworthiness (SCHUFa-free).
Applying for a loan with a guarantor should be done carefully, considering the potential strain on the borrower's financial situation and the responsibility and risk borne by the guarantor. It is important to check one's financial situation, compare offers, and submit a loan application.
It is worth noting that a surety receives a neutral SCHUFA entry that initially does not affect their own SCHUFA score, but may cause problems when trying to obtain their own loan. This is because the SCHUFA entry shows that the person has acted as a guarantor for another's loan.
There are various types of guarantees, including on-demand guarantee, global guarantee, guarantee on first demand, limited and time-guarantee. A self-enforcing surety allows the creditor to approach the surety before the borrower's payment default is legally established.
In summary, loan guarantees can be a valuable tool for those who lack creditworthiness, but it is crucial to understand the responsibilities and risks involved. It is important to consider the potential impact on the private relationship and the financial situation of both the borrower and the guarantor before deciding to act as a guarantor for a loan.
