Guarantees and pledging
Granting a loan is normally subject to some sort of security for the bank having a repayment of the loan. Generally, the collateral is a real security, in other words a concrete asset item, such as the apartment acquired with the loan money. The share certificate giving title to the possession of the apartment, or the mortgage deed of a real property are given to the bank under a contract of pledge and are kept by the bank during the loan period. When the loan is repaid according to the contract, the bank will return the property constituting the security to the customer. Should the debtor not pay the credit as agreed, the bank can, under the contract of pledge and the satisfied criteria of the Consumer Protection Act, demand that the security be sold in order to have the loan principle repaid to the bank.
A guarantee or suretyship is another traditionally used form of security. Under the guarantee engagement, the guarantor accepts a personal liability for another person’s debt in view of a situation where the debtor is not able to repay the credit in line with the loan contract. The guarantee is normally in the form of an absolute guarantee whereby the bank can make a claim vis-à-vis the guarantor once the debt has fallen due for repayment. In the cases of an absolute guarantee, the responsibility of the guarantor corresponds to that of the party that is personally responsible for the credit. A conditional guarantee is an engagement whereby the bank must first sell the assets in security of the same credit and cover the loan principle with the obtained sum, and only them claim the remaining sum of the loan from the guarantor.
Prior to signing a guarantee engagement for a credit, it is advisable to seriously consider whether the actual debtor (i.e., primary debtor) is capable of paying back the credit. The bank documents should also be read thoroughly to be fully aware of the size of the guarantee liability in terms of euro. The guarantor should also take their own financial condition into consideration and think how they would cope with the credit they might later become liable for.