Third-party guarantees and suretyships

26/04/2022

When a bank lends us money, it will often ask for security to make sure it will be able to collect the loan. Aside from collateral (as in a mortgage) or personal guarantees provided by the debtors themselves, banks may request a guarantee from a third party.

In Spain there are two instruments whereby a natural or legal person guarantees or secures the fulfilment of certain obligations of another person: avales and fianzas. Although the terms “avales” and “avalistas” are more widely used in Spanish, the actual legal concept we are talking about is often a “fianza”. There are a number of differences between them:

• Avalistas make themselves equally liable for another person’s payments, i.e. the bank can claim the debt from them without having to prove the principal debtor is insolvent.
• Fiadores cannot be forced to pay if the bank has not previously and unsuccessfully claimed the debt from the principal debtor, unless it is expressly stated that the guarantee is of a joint and several nature. Another concept to be aware of when acting as someone’s guarantor is the “benefit of discussion”, which prevents the creditor from claiming the debt from the guarantor if the principal debtor’s assets have not been exhausted beforehand. Some guarantee contracts include a waiver of this benefit by the guarantor. You should therefore pay attention and read what you are about to sign carefully. And if you have any doubts, don’t keep them to yourself: ask.

Usually, these types of guarantees are not cancelled or extinguished until the underlying obligation has been cancelled or extinguished.

When extending a loan, even if these guarantees are given, banks must first assess the borrower’s ability to meet the financial obligations to be assumed. To this end, they must take into account the borrower’s usual sources of income, without relying on guarantors, sureties or assets offered as collateral, which must always be considered as a secondary and exceptional means of recovery to be used only when the primary means of recovery (collection from the principal debtor) has failed.

If the loan is refused, the bank is required to inform the guarantor as well as the applicant.

Banco de España Circular 5/2012 requires guarantors to be informed in detail of the extent of their obligations and the responsibilities they will be taking on. Guaranteeing or standing surety for a loan is a decision that should not be taken lightly, particularly in the case of large loans. You should bear in mind the following:

• Guarantees appear in the Central Credit Register and will be taken into account to assess guarantors’ and sureties’ ability to pay should they decide to request financing while the guarantee is still in force.
• Guarantors and sureties put their assets on the line, often their principal residence. They should therefore be aware of the risks they are assuming and find out what the guaranteed party’s assets and obligations are, regardless of whether the borrower is a relative or a friend, as is often the case.