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Preparing security/collateral for bank loan (8): GUARANTEES

By Emeka Anaeto

LAST week we dwelt on the use of insurance policy as security for loan. Towards the end of this long stretched discus on preparing security for bank loan we shall outline all the forms of security/ collateral in one list.

Today we discuss the place of Guarantees in getting a bank loan.

A guarantee is a collateral security involving three parties, in which the third party, the guarantor, agrees to be liable for the debts of a second party, the borrower, if he does not pay the first party, the bank.  It is a promise in writing made by the guarantor to the creditor to be liable for the debt of the debtor.

In most cases the bank would require the third party, the guarantor, to back-up the guarantee with tangible security, assets or cash as a form of additional securities like land and building, stocks and shares, insurance policy etc.  If this is not done the security or collateral remains intangible and clearly it is an unsecured lending. However, a guarantor loan is a type of unsecured loan that requires a guarantor to co-sign the credit agreement. Note that the guarantor’s obligation comes into effect only when the borrower fails to pay, hence the guarantor is the secondary obligor while the  borrower is the primary obligor.

In most cases the bank would have put all efforts to recover the loan on the primary obligor before reaching out to call up the security provided by the secondary obligor.

Usually, people or businesses with poor or limited credit record and without strong assets can only get a loan if they have a guarantor. For example, if your business is relatively young without significant assets and you as an individual is relatively of low net-worth and you are looking to obtain a loan for your business, certainly your bank would require you to find a guarantor before the bank will grant the loan.

Normally the guarantor is a form of surety as an organization or person that assumes the responsibility of paying the debt in case the debtor defaults or is unable to make the payments. The use of surety is most common in loans in which the lender is questioning whether the borrower will be able to fulfill the repayment obligation, in which the lender would now require the borrower to provide a guarantor in order to reduce risk, with the guarantor entering into a contract of suretyship, which can be in the form of a “surety bond.”.

This is intended to lower risk to the debtor (or lender), which might lower interest for the borrower.



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