Guarantee - Find out more about the topic and your options
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WHAT IS A GUARANTEE?
A surety is usually used as security for credit and loan agreements. Additional security from a guarantor is also often necessary for rental apartments.
There are always three parties to a guarantee:
Principal debtor: Needs a guarantor to secure obligations or debts.
Guarantor: Declares their willingness to assume obligations or debts in the event of a payment default.
Creditor: Receives the payments from the principal debtor or guarantor - in most cases this is a lender.
The guarantor therefore assumes the obligations towards creditors if the principal debtor defaults. There are three different forms of surety:
Simple or ordinary surety
This form of guarantee is usually used as security for loans. The guarantor is only liable if the creditor has tried unsuccessfully to collect the debt from the principal debtor. This is also known as "subsidiary liability". It is important that a written agreement is made which contains all the important contractual conditions. The guarantor is generally liable up to the amount of the principal debt (including interest and costs), unless otherwise stipulated in the contract.
Default guarantee
This form of guarantee offers the guarantor more security. The guarantor is only liable if the principal debtor has suffered a specified default, which is defined in advance. For example, if an unsuccessful enforcement measure has been carried out.
Important tip: If you have assumed a guarantee within a marriage, divorce proceedings do not affect your legal obligations towards creditors. Irrespective of an arrangement for the division of joint debts in the event of dissolution of marriage, you should therefore make sure that no unwanted guarantees remain.
Directly enforceable guarantee
With this form of guarantee, the guarantor is directly liable as soon as the principal debtor is unable to pay. In this case, the guarantor has no waiting period and cannot first check whether the principal debtor is really unable to pay. As soon as a payment default occurs, the guarantor must step in.
With all three options, the guarantor should be aware that, in the worst-case scenario, they will have to assume all obligations if the principal debtor defaults.
WHAT EXAMPLES OF GUARANTEES ARE THERE?
Guarantees can be used in many different areas. Below you will find some specific examples of different guarantees:
Loan guarantee: A young adult takes out a student loan. A parent assumes the guarantee and is called upon to make the payment if the child is unable to pay.
Rent guarantee: A tenant's income is not sufficient security for the landlord. A family member stands in as guarantor for the rent payments. If the tenant is unable to pay, the guarantor undertakes to settle any outstanding rental costs.
Business guarantee: An entrepreneur needs a loan for his business, but does not have the necessary qualifications. A friend undertakes as guarantor to pay the loan installments in the event of default.
Bank guarantee: A company wants to take on the contract for a tender and requires a guarantee from the bank. In this way, the client can be sure that the contractual obligations will be met.
Guarantee for visa applications: A person in the host country can act as a guarantor for the visitor's departure from a country and, through their commitment, also cover any costs incurred.
Guarantees for court proceedings: In order to cover the costs of, for example, appeal proceedings, a guarantor can undertake to provide security in the context of court proceedings.
WHICH LEGAL PROVISIONS MUST BE OBSERVED?
First of all, it is important to know when exactly a surety is involved. There are similar concepts of contracts that are often confused with a surety. The following table clearly explains the differences:
VARIANT | MEANING |
|---|---|
Guarantee |
|
Assumption of debt |
|
Credit order |
|
Aval (guarantee) |
|
Lien |
|
LEGAL PROVISIONS FOR A GUARANTEE IN AUSTRIA
Formal requirements: The guarantee declaration must be in writing and signed by the consumer in person.
Limitation of guarantor liability: The guarantor's liability is generally limited to the payment options available at the time the contract is concluded.
Duty to inform: The creditor must inform the guarantor of all risks and the scope of liability before concluding the contract. This applies in particular to consumer credit transactions.
Objections by the guarantor: If a guarantor has certain reasons for rejecting a creditor's claim, he has the same rights as the principal debtor.
What is the difference in liability between the principal debtor and the guarantor?
Liability: While the principal debtor has a so-called primary obligation for his payments, a guarantor only has a secondary obligation. The principal debtor is therefore always directly liable, but the guarantor is only secondarily liable. This means that the guarantor only has to pay if the principal debtor is unable to pay. The directly enforceable guarantee is an exception. In this case, the guarantor is directly liable for payment delays or defaults. The differences in liability therefore mainly relate to the point in time.
Responsibility for payment: In contrast to the guarantor, the principal debtor is primarily responsible for timely repayment; the guarantor only steps in if the principal debtor has not fulfilled these obligations.
Consequences of non-payment: If the principal debtor does not meet his obligations, the guarantor must step in. This can lead to enforcement measures for both the principal debtor and the guarantor. In many cases, the guarantor then has the right of recourse - i.e. can reclaim the money paid from the principal debtor.
WHAT ARE THE REQUIREMENTS FOR GUARANTORS?
The basic requirement for a guarantor is that they must be of legal age and have legal capacity. This means that they must be mentally capable of concluding legally binding contracts independently.
The guarantor must voluntarily agree to enter into a guarantee. Guarantees that have come about through deception, coercion or without sufficient information can be declared invalid.
The guarantor must have sufficient creditworthiness. This means that they must be financially stable in order to be able to step in if the principal debtor defaults on payment.
WHAT DOCUMENTS ARE REQUIRED FOR A GUARANTEE?
Below you will find a list of documents that are usually required for a loan guarantee, for example:
Valid photo ID (proof of identity)
Financial evidence (payslips, bank statements, tax assessment notices, existing liabilities, etc.)
Proof of property and assets (e.g. real estate, insurance)
Loan documents of the principal debtor (terms & conditions of the loan)
Guarantee declaration (official document with conditions for the guarantee)
In some cases, the consent of the spouse may be required.
WHO IS SUITABLE AS A GUARANTOR?
This depends on various factors. On the one hand, a guarantor must fulfill the legal requirements, and on the other hand, they must also be financially capable of assuming a guarantee. In any case, guarantors must be of legal age and legally competent (able to enter into binding contracts). Other important requirements are
Sufficient creditworthiness and financial stability
Understanding of all obligations and the associated risks
Voluntariness
Independence (guarantees could be viewed critically within the family)
Historically no financial difficulties (debts, ongoing insolvency proceedings, poor credit history, etc.)
Legal admissibility (Some professional groups or persons are excluded from a guarantee.
WHAT SHOULD I CONSIDER AS A GUARANTOR BEFORE CONCLUDING A CONTRACT?
If you decide to take on a guarantee, you should be aware of the following points:
Make sure you understand all the terms of the contract.
Be aware that your financial situation can deteriorate considerably if you have to pay for non-payments by the principal debtor.
Check the solvency of the principal debtor to minimize the risk for yourself.
Bear in mind that your own credit rating may deteriorate if you have to act as guarantor.
Be aware that you may not be able to take out any (further) loans yourself, as potential lenders will include your guarantee in their decision.
If possible, you should insist on limiting your guarantee to a certain amount or a certain term.
Check whether and how you can withdraw from your guarantee.
If you have any doubts, seek legal advice before you enter into a guarantee.
WHEN IS A GUARANTEE INVALID?
A guarantee can become invalid if:
the guarantee has not been provided in writing in accordance with statutory requirements.
the guarantor was not legally competent at the time the contract was concluded (e.g. underage or mentally impaired).
the guarantor was fraudulently deceived or forced to provide the guarantee.
there is a disproportion between the performance and the consideration (usury).
the underlying contract is invalid for any reason.
the guarantee leads to overcollateralization of the creditor.
the contract has been substantially modified without the guarantor's knowledge or consent.
the purpose of the guarantee no longer applies (e.g. if the creditworthiness of the principal debtor is reassessed).
HOW LONG IS A GUARANTEE VALID FOR?
This depends on the type of guarantee and the individual contractual agreements. An unlimited guarantee usually ends when the principal debtor's debt has been settled. In the case of a fixed-term guarantee, the contract ends at the end of the agreed period, unless otherwise agreed in the contract. If a principal debtor or guarantor becomes insolvent, this can affect the duration of the guarantee. In principle, however, the following applies in any case: as soon as the principal debtor's debt is settled, the guarantor's obligation to pay ends.
WHAT HAPPENS IF A GUARANTOR IS UNABLE TO PAY OR BECOMES INSOLVENT?
The actual consequences always depend on the respective contract. Below you will find the general consequences that could follow:
The guarantor function is lost as the additional security provided by the guarantor is no longer available.
Lenders could demand alternative collateral from the principal debtor, e.g. collateral agreed in a contract. In addition, they could possibly demand earlier repayment. The guarantee agreement could be adjusted or terminated.
In the event of insolvency proceedings, the claims of the principal debtor's creditors can become part of the insolvency proceedings. In this case, however, the creditor would have to register their claims from the guarantee as part of the insolvency proceedings.
The guarantor's assets could be seized to cover the debt.
In serious cases, the guarantor may become personally insolvent.
WHAT HAPPENS IF THE GUARANTOR DIES?
Depending on the legal system or the conditions stipulated in the contract, the death of a guarantor may have the following consequences:
In most cases, the guarantee is based on the estate. This means that any liabilities arising from the guarantee must be paid from the assets of the estate.
In most cases, the heirs must assume the rights and obligations of the guarantor. Normally, however, heirs are not liable with their personal assets, but only with the estate of the deceased.
The estate administrator should inform the creditor (e.g. the bank) of the guarantor's death, as the principal debtor's risk often has to be reassessed as a result.
If in doubt, you should seek legal advice and have the guarantee contract checked for rights and obligations.
HOW DO I CALCULATE MY BUDGET?
Regardless of whether you are the main debtor or guarantor, you should be sure that you can really afford the repayment before signing a loan agreement or other obligations. Basically, you simply compare your income and expenditure and can estimate how much money is left over for a monthly loan installment or rental costs, for example.
Determine your income: Record your regular sources of income, e.g. from salary, rental income or side jobs.
List your expenses: First list your fixed or constant payments such as rent, car costs, insurance, repayments, etc. and add them up. Then estimate the average monthly expenses for clothing, leisure, gasoline, repairs and other irregular expenses and add them to the fixed expenses.
You can find estimates online that banks use as a basis for calculating these irregular expenses.
Use old bank statements or credit card statements to realistically estimate your costs.
Sorting your expenses by topic will give you a better overview.
Net budget: Now subtract the total expenditure from your total income. If you are spending more than you are earning, you should reconsider taking out a loan or a guarantee or make adjustments. If the total is positive, you now know what amount you have available for a possible loan installment or guarantee.
If you find that you do not currently have the financial means to take out a loan or sign up for a guarantee, you have the following options:
Find out if there are areas where you can reduce your spending.
Set yourself savings goals.
Review your budget regularly to achieve your goals.
Adjust your expenses on an ongoing basis if there are changes (e.g. new expenses, salary increase or job loss, etc.)
ARE THERE ANY GOOD ALTERNATIVES TO A GUARANTOR?
If you urgently need a loan but can't find a guarantor, there are other options for people with a poor credit rating. These topics might help you: