Most people take some kind of loan during their life. Often, especially for larger purchases such as your own home, obtaining a loan requires not only your own savings and regular income, but also collateral or guarantees. What, then, exactly does guaranteeing a loan mean?
Simply put, guaranteeing a loan means that if the borrower is unable to repay his loan according to the terms of the agreement, the guarantor is responsible for repaying the loan. However, in addition to the personal guarantee, other guarantees can be obtained for the loan.
Personal guarantee therefore simply means that an individual guarantees the repayment of a loan taken by another person or company. If the borrower is unable to repay the loan he or she has for any reason, the responsibility for the loan is transferred to the guarantor.
Often, for example, parents provide mortgages for their children or a spouse guarantees a business loan for their entrepreneurial spouse. For example, a home purchased in a home sale usually acts as collateral for the loan itself, but the collateral value of the home is usually only about 75% of the value of the home, and the rest must be covered by other means – own savings, other collateral or personal guarantee. Banks generally require the home buyer to have at least 10% of their own savings, other collateral or guarantees must be obtained for 10-15% of the home’s purchase price. Although the percentage may not sound like much, it may already mean, in dollars, the amount that can be put on the economy rather than the economy.
It is not advisable to become a guarantor on very light grounds, as it always involves risk. If you suddenly have to pay off the loan yourself, it can cause significant financial problems. If a friend applies for a loan as a guarantor, you should think carefully about why the guarantor is really needed, what your friend’s financial solvency is, and what risk he is actually taking. Indeed, personal collateral is relatively rare nowadays, because with the increase in overall wealth many borrowers have to provide collateral, and on the other hand there are several lenders on the market who provide loans without collateral and guarantees, albeit often at relatively high prices.
The borrower may also purchase a so-called “collateral” or “loan security”, which is a premium for insolvency. The insurer is an insurance company that pays off the borrower’s debt to the lender in case of sudden payment difficulties. However, the insurance company usually recovers its claims from the policyholder at a later date, so it is unlikely that the loan will be repaid, but insurance can help out the worst.
On the other hand, the tightening of loan ceilings, for example in housing transactions, may increase the use of personal guarantors or collateral. Thus, in practice, a person gives his or her own property as collateral for a loan from another person or company.
It is worth considering carefully as a guarantor, especially if you are in the process of making larger purchases and borrowing to finance them. Indeed, securing another loan may reduce the amount of your own loan. So, if you have taken out another loan, you may not get the same loan as you would otherwise have. Becoming a guarantor increases the risk of reduced solvency.
If you have secured a collateral for a loan, it is worth remembering to ask the bank for the release of the pledge as the loan is advanced. This way you can release yourself from the collateral and use the pledge to secure your loan, for example. The guarantor can ask the bank for an explanation of the progress of the loan repayment, thus knowing when the collateral or collateral is no longer needed and then requesting its release.
Think about these things before becoming a guarantor
When your own child, relative, or good friend asks you for a loan, it can be difficult to say no. However, it is worth considering carefully and realistically.
As mentioned earlier, becoming a guarantor may also affect your own loan availability. For example, if you have plans to buy an apartment within the next year or two, you might want to discuss this with your bank before agreeing to be a guarantor.
It is also worth realizing your own solvency and risk tolerance. If you are already at the brink of your financial stamina and unexpected expenses threaten to overthrow your own financial card house, you should not agree to secure another person’s loan. No matter how you would like to help, you should not risk your own finances. Besides, you might be able to help your friend in other ways.
Before becoming a guarantor, it is also helpful to carefully examine the borrower’s current financial situation. If the borrower’s financial situation is weak, it is not advisable to become a guarantor of the loan. Find out the borrower’s situation as accurately as possible. For example, you can request to see all the paperwork involved in a loan and get involved with the bank for loan negotiations. If the borrower does not want to openly share this information with you, do not become a guarantor.
In addition to the financial aspects, it is worthwhile to carefully evaluate the social aspects and the potential impact of the guarantee on your relationship with the borrower. Mixing friendship with money is usually not a good idea, and it is worth thinking about how much friendship means, how much it is willing to pay and what else to lose. Often money is even more important in friendships after all, and if trust is betrayed and you have to pay off your friend’s loan, you may end up losing not only your money but also a good friend.
The state guarantee
In addition to personal guarantee, it is also worth remembering other guarantee options. A student loan or mortgage guarantee can also be obtained from the state. The amount of the student loan guarantee depends on the applicant’s age and place of study. For example, find out about Kela’s guarantee rights.
Anyone, regardless of income, can get a mortgage. A guarantee can be obtained as long as at least half of the apartment is purchased and the apartment comes for the buyer’s own permanent use. A state-guaranteed home loan can be used up to 85% of the price of the home you purchase, with a maximum guarantee of EUR 50,000. There is no need to apply for a state guarantee, but it is agreed with the bank when other issues related to the loan are agreed.
If you are an ASP saver, you can get a state-guaranteed home loan for a higher percentage, but not more than the same $ 50,000. There are other benefits to an ASP saver, such as tax benefits, so saving ASP can be a good idea too.
Loans without guarantors
In addition to traditional banks, there are now many other players in the loan market who are specifically focused on granting consumer loans. The front line of these lenders’ loan products include a variety of consumer loans, loans, and loans that do not require collateral or guarantors. Although these loans may not be used to purchase a full home loan, they may be sufficient, for example, as a down payment or to supplement your own savings requirement.
If you need a loan, think carefully about your financial situation, study the different options carefully, and choose the best option that suits you best. Obviously, because no borrower is required to provide collateral or guarantors, the risk to the lender is higher and this is naturally reflected in the price of the loan. Credit without collateral or collateral is always more expensive than a loan with collateral and collateral. However, since there are many players in the market, the comparison is clearly worthwhile.
If you have trouble getting a loan, it may be a good time to think about your own money and finances. In some cases, it may even be better to just accept that the loan is not now profitable, and a better option may be to postpone the acquisition within a few years and now focus on saving and thereby gaining better negotiating positions for future loan negotiations. . By saving the money you plan on loan repayments in a savings account, you can have a nice pot in just a couple of years and make it easier to get a loan next time.