The personal guarantee is a way of backing a loan taking as a guarantee the debtor's own solvency, as well as the inclusion of a guarantor or guarantor.
That is, a personal guarantee is one where the loan applicant puts his regular income generation and equity as a guarantee. That is, the funds you have available (and those that you are expected to receive in the future) are evaluated.
Likewise, part of the personal guarantee is the presentation of a guarantor. This is a third person who agrees to meet the debtor's obligations in the event of non-payment.
Characteristics of the personal guarantee
Among the characteristics of the personal guarantee we can highlight:
- It can be used to support a loan that will be used for studies, travel, business or other.
- The financial institution assesses the applicant's ability to pay, requiring the latest proof of payment of his salary or the income he receives from his business. Also, your credit history is reviewed.
- The credit institution also evaluates the guarantor, in the same way that it does with the debtor.
- It does not require the presentation of a movable or immovable property as endorsement. In this case, we would be facing a real guarantee.
- As they do not have a tangible asset as collateral, they are not usually very large loans (such as mortgage loans) or very long-term.
Advantages and disadvantages of the personal guarantee
The advantages of the personal guarantee include:
- It does not require the debtor to own high-value assets, such as real estate or jewelry.
- The assessment of the lender will be objective and based on reliable documents submitted by the applicant.
- The presentation of a guarantor is a very useful option for those who do not have a high ability to pay or have unstable income.
However, this type of guarantee also has disadvantages:
- The debtor must have documents that prove their income (The same with the guarantor). That is, there may be people who receive income, but if they are informal, it will be difficult for them to access financing.
- The lender does not have as collateral an asset that he can sell in case of default to recover the credit granted. That is, if the debtor defaults, the only thing left to do is demand payment of the debt from the guarantor.
- It depends on a careful evaluation of the client, which can often be imperfect. In other words, there is always some risk, even if it is minimal, that the debtor will default.