Archive April 2019

The Principal Borrower Does Not Service the Due Credit Installments

Granted that both statements and the documented behavior have their justification. Who would help a really good friend in a financial emergency to the best of his knowledge and endowment? Finally, he / she would do the same in a reverse case – right? But people who think and act that way can usually confirm the other sentence as well. Not a few have experienced at least once in their lives that money really stops the friendship. So what if a good friend or family member approaches you with a request to vouch for a much-needed loan? No problem – pure formality? Not at all, because that’s not what a credit guarantee is. It sometimes entails not insignificant risks and you should be fully aware of them. At worst, their own existence is at stake here!

Need for a loan guarantee is synonymous with increased credit default risk

 Need for a loan guarantee is synonymous with increased credit default risk

The fact is that the need for a loan guarantee is always a clear indication that the bank is expecting a loan with an increased risk of default and therefore expects a corresponding hedge. The extended coverage of the loan is done by using a second source of money, which can be accessed immediately in case of installment failure. Plain: Credit bureaus are considered second borrowers and all related obligations under the loan agreement. Completely insignificant from the point of view of the bank, in which relation one stands to the main borrower. Whether a spouse, another adult family member, a relative or a friend acts, this does not matter at all. The only thing that matters is the second signature of a solvent person under the loan agreement. However, that signature is all too often done out of pure friendship. And without worrying about the risks this guarantee can bring.

The loan guarantee and its risks

 The loan guarantee and its risks

For with a guarantee applies: One is liable for the entire loan amount including interest. What this means is that if the principal borrower does not service the due credit installments, one is called to act as a guarantor to pay the loan installments. In addition, a loan guarantee due to the status of “second borrower” is also reported to various credit bureaus – above all SCHUFA. Such an entry constitutes a burden on one’s own credit score, which can be detrimental to a later acceptance of a loan for one’s own purposes. For example, in the form of poorer credit terms. For even if you are not the actual (principal) borrower, the guarantee assumed for another represents a risk for each bank. This risk is based on the assumption that the actual borrower may not be able to pay the installments any more and you may Finally, Bürge has to take over the entire loan. One should therefore always ask the question: am I prepared in an emergency for the debt of another person, no matter whether friend, family member, partner, etc. to pay in an emergency?