Credit Guarantee – You Should Know
Anyone who provides a guarantee for another person has to pay for that person’s debts if they cannot pay – this is how the concept of a guarantee can be described in a few words. According to Austrian law, there are different types of surety, in a sense they correspond to a gradation according to the degree of liability for the guarantor. However, a guarantee is always an obligation to take over the payment of debts for another person, if the person cannot afford to do so. As a guarantor, you should therefore consider very carefully whether you take over a guarantee or not. In any case, a guarantee declaration is much more than a friendship service, because depending on the amount and duration of the guarantee, the guarantor can cause serious financial difficulties.
The reasons for a guarantee are so different
The best friend urgently needs a bank loan and asks you to act as a guarantor for the bank. After all, you are in a permanent employment relationship and have a regular income, so the loan approval from the bank should not be a problem due to your creditworthiness. However, a financing bank may also require additional security because a borrower is still very young and in training. In this case, parents may be asked to provide the guarantee.
In another case, a wife without their own income should ensure that their unemployed husband repays the loan installments on time, even though no new employment relationship has yet been concluded. The reasons why a guarantee is required to secure a loan are extremely diverse. Basically everyone can be asked for this superficial friendship service, but it is of course particularly attractive as a guarantor if you have a regular income and are in a stable and secure employment relationship. As a rule, however, the requesting guarantee is raised by the financing bank and brought to the borrower.
A guarantee is security for the bank
As diverse as the causes of a guarantee may be, the bank’s request for a guarantee ultimately always goes back to the same reason: it doubts the creditworthiness of the borrower and demands additional security. Before a credit institution grants financing, it checks very carefully whether the borrower is financially able to repay the loan in accordance with the contract. She wants to know if he has an income each month and if that income is high enough to pay his living expenses and to pay the loan. She also requests an extract from the KSV, which gives her insight into past payment behavior.
If income raises doubts about solvency or if the KSV excerpt shows that there have been irregular payments recently, the bank attests to its potential borrower’s poor creditworthiness. The risk is then very high that the loan will not be paid as agreed. To reduce this risk, she calls for a guarantee for her own safety. The borrower thereby improves his creditworthiness and has the chance of a financing that he would not get without a guarantor. Sometimes a guarantor is able to take out a loan in the first place, sometimes the guarantor receives better conditions and cheaper interest. Ultimately, it always depends on the individual case in which respect a borrower benefits from ordering a guarantor. However, a guarantee is always an additional security for the bank, through which it reduces the risk of default.
A guarantee contract must be in writing
Since a surety is an obligation for the guarantor that is of considerable importance, a surety agreement must be concluded in writing. Only then is the guarantee effective for all parties. In this contract you, as a guarantor, undertake to be liable and pay for a third-party debt if the principal debtor fails to pay. A guarantee contract lists all the modalities that you as a guarantor should know so that you know exactly what obligation you are agreeing to.
A guarantee contract is therefore used to protect you so that you know your rights and obligations. At the same time, it is of course also a safeguard for the bank, because it naturally wants to see its claim against the guarantor securitized. A guarantee contract should definitely state what amount you are guaranteeing and how long the guarantee is running. In the case of an unlimited guarantee without a precisely defined amount, the greatest risk for you is that you are liable for an unlimited period and in large amounts, without restricting your payment obligation. Therefore, when signing the surety agreement, you should make sure that your obligations are detailed. When signing the surety agreement, the donor has to point out why he is asking for a surety. If he is aware of the financial difficulties of his borrower, he must pass on his knowledge to the guarantor. This is to enable the guarantor to better assess his liability risk. The bottom line is that he knows as exactly as possible what risk he is taking when he acts as a guarantor.
These forms of guarantee are common in Austria
According to Austrian law, there are three types of guarantee.
This is how the classic guarantee is regulated
With a normal guarantee, you will only be used as a guarantor for payment if the borrower as the main debtor has been unsuccessfully warned by the financing bank as the creditor. There must be a reasonably long period between the issuing of the reminder and the request for payment to the guarantor. The bank is therefore asking its principal debtor to meet its payment obligation and to settle the outstanding debt. To do this, it sets a precisely defined deadline, which must be long enough to initiate the payment. Only then can the bank ask its guarantor to settle the outstanding liability and thereby meet its guarantee obligation.
This applies to liability as a guarantor and payer
This form of guarantee is often required to secure bank loans. It has serious consequences for the guarantor. In this case, as the guarantor, you are the undivided co-debtor for the entire loan. If the borrower defaults on payment, the lender is free to decide who to oblige to pay first. He is free to choose whether he uses the main debtor as the borrower, you as the guarantor or both of you at the same time for the payment and also initiates legal proceedings. Of course, this form of guarantee brings a high level of security to the financing bank. As a guarantor, on the other hand, you should carefully consider whether you want to take on a guarantee for liability as a guarantor and payer, because you have no way of avoiding your obligation in the event of a default.
The default guarantee as a weakened variant
With this form of guarantee, you can only be called upon as a guarantor if the lender has already tried to get the claim recovered by court and if he was unsuccessful. The default guarantee only applies if the borrower actually fails to pay and if he has already legally opposed it. For this reason, the default guarantee is also called the weakest or mildest form of guarantee.
What is the right to moderate?
Austrian law knows with the “judicial right of moderation” an interesting instrument for the protection of inexperienced guarantors. Since January 1997, a judge may moderate or even waive a guarantor’s payment obligation, taking into account individual circumstances. This judicial right of moderation was created because in practice there are always cases in which family members have been persuaded by another member to provide a guarantee without income or assets. It is very typical, for example, that a wife with no income is asked by her husband, who is also destitute, to provide a guarantee if, for example, he needs a loan for a new car.
Cases are also known in which old parents have been brought to provide a guarantee for their unemployed children or for children in education or in college. The judge can exercise his judicial right of moderation if the payment obligation is significantly disproportionate to the performance of the selected guarantor. If, for example, a spouse or a parent is particularly reckless, inexperienced or dependent on the main debtor and has therefore signed the surety agreement, the judge can exercise the right to moderation and thereby release the guarantor, in whole or in part, from his obligation.
What you should know about immoral guarantees
The Supreme Court (OHG) has also made a groundbreaking decision on so-called old contracts. He mentions a number of reasons that lead to the ineffectiveness of a guarantee if the family members are without income or assets. If these reasons work together, the entire guarantee contract is declared null and void because it contradicts “good morals”. Such reasons are, for example, a considerable disproportion between the liability of the guarantor and his financial capacity or a complete over-indebtedness on the part of the main debtor. Against this background, many banks no longer require a spouse’s guarantee. As additional security, however, they ask the spouse to act as a common borrower. As a result, he, like the main debtor, is liable for a concluded credit contract. In this case, even a penniless guarantor cannot indicate a violation of common decency.