What risks am I taking as a guarantor?
Before granting a mortgage or loan, banks try to make sure that we will return the money lent. One of the most frequent measures taken by banks is to include a guarantor in these transactions, this is, an individual who assumes the obligation to pay another person’s debt (the main debtor or guaranteed party), when the latter is unable to do so.
But, what risks do guarantors take? And what rights do guarantors have should things go wrong?
First of all, you need to know that if you are guarantor of a transaction the bank may request all your goods and income. The risk of having to pay will depend, in first place, on the guaranteed party’s solvency, but also on the guarantee’s features. Therefore, it is essential that you pay attention to the content of the agreement and in particular to:
- The powers of the guarantee’s beneficiary (the bank): if the guarantee is joint or on first demand, the guarantor assumes further risks, since the bank can require compliance with the obligation to pay as if he/she were the main debtor. If the guarantee is not joint nor on first demand, and no other agreement was reached, the bank must first request payment from guaranteed party.
- The duration of the guarantee: it is important to bear in mind that the guarantee will remain valid while the guaranteed liability remains effective which, in the case of mortgages, can be several years.
- The guaranteed liability: it consists in repaying a specific amount of money that you must be aware of. You must also be aware that the guaranteed amounts can be significant, putting your personal finances at risk.
In any case, when the guarantor ends up assuming the corresponding debt, he/she is entitled to request that the guaranteed party refunds the total amount paid plus interest and costs.
In addition, banks hold certain liabilities concerning guarantors. If you decide to guarantee a transaction, please remember that:
- You must be provided with the corresponding pre-contractual information concerning the guaranteed mortgage or loan.
- You must be given appropriate explanations about the risks you are assuming.
- If you are required to pay the debt, you must be informed with the same details that the guaranteed party was provided with.
Finally, it’s important to recall that mortgage guarantors who are under certain circumstances of social and economic exclusion may apply for subsidies aimed at easing compliance with obligations, in accordance with Royal Decree-law 6/2012