Guarantees and pledges

What is collateral required for?

The purpose of a guarantee or pledge given as collateral for a loan is to safeguard repayment of the loan to the lender, i.e. the creditor. Although the loan decision is primarily based on the loan applicant’s ability to pay, the collateral provided as security for the repayment of the loan is also important.

What is a deficiency guarantee?

In housing loans, the house/apartment purchased is typically the collateral for the debt. A guarantee or pledge given for a housing loan by an external private person is a “deficiency guarantee”. If the debtor fails to repay the loan, the loan principal can be collected from the guarantor or pledger only if the debtor’s house/apartment serving as collateral is not sufficient to repay the debt in full.

What is the guarantor’s role?

In issuing a guarantee, the guarantor assumes liability for a loan or an agreed amount with his or her personal assets. If the guarantee is a directly enforceable guarantee, the creditor may collect the debt directly from the guarantor.

There may be several guarantors, in which case each guarantor is jointly and severally liable for the debt. Payment of an overdue debt can be demanded from any one of the guarantors. If the guarantor has to pay the debt, he or she is entitled to receive from the debtor any amount paid to the creditor on the basis of the guarantee. The guarantor has the same right vis-à-vis the other joint and several guarantors, according to their per capita shares of the debt, where he or she has paid an amount of overdue principal in excess of his or her own share.

What is a government guarantee?

A private customer applying for a loan in order to purchase an owner-occupied home may also receive a government guarantee for the loan. Banks intermediate government guarantees in connection with their housing loan decisions. A government-guaranteed housing loan can be no more than 85% of the purchase price of the house/apartment or of the estimated cost of the construction of a detached house.

What does a pledge mean?

In connection with a pledge, the debtor or another person gives his or her assets as collateral for a loan. If the loan is not repaid, the creditor may sell the assets given as collateral and use the sales proceeds to repay the loan

How is the value of collateral determined?

The creditor determines independently the value of assets given as collateral for a loan. The collateral value is not the same as the market value of the assets.

For example, the bank estimates the collateral value of real property or housing company shares by deducting a certain safety margin from their market value. This ensures that, should the market value of an asset decline, loan repayment will not be jeopardised. The bank cannot, however, require additional collateral from a private customer due to a normal reduction in the value of the collateral.

What do banks accept as collateral?

In addition to housing company shares and real property, banks also accept deposits and listed shares, for example, as collateral. In general, the collateral value calculated by the bank for these types of assets has a certain safety margin, determined on a case-by-case basis, deducted from their market value.

What should I be aware of before becoming a guarantor or pledger?

Check the following aspects before you commit yourself to giving a guarantee or pledge:

  • Verify from the debtor his or her financial position.
  • Clarify the content and scope of the guarantee or pledge agreement.
  • Make sure that all unclear points are clarified before you sign the agreement.
  • If you are liable only for a portion of the debt or only for a certain period, make sure that these conditions are documented in the agreement.
  • Make sure that you receive your own copies of the guarantee or pledge agreement and copies of the promissory notes, with repayment schedules, for which your guarantee or pledge is given.  Keep them in a safe place.
  • Always be prepared for the possibility that you may become liable for the commitment you have undertaken.