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Financial Dictionary - Guarantee
Guarantee
The Banco de España defines a guarantee as “a contract in which a natural or legal person guarantees or ensures compliance with obligations, undertaking to pay another person's debt if that person does not pay it.”
Guarantees can be classified based on different variables.
According to the issuer type a distinction is made between:
- Personal guarantee: a natural or legal person undertakes to pay the debt in the event that the main debtor defaults on the set payments. These types of guarantees are the most common in both company financing and consumer loans.
- Bank guarantee: In this case, a bank undertakes to pay the debt.
According to the guarantee obligation in place, a distinction is made between:
- Technical guarantee: in this case, the guarantee is the obligation to perform certain work or provide services based on the terms and conditions.
- Financial guarantee: this consists of paying the amounts within the set periods.
When is a guarantee necessary?
A guarantee is especially important in some cases:
- Individuals: it is usual for individuals to request a lease guarantee.
- Companies: companies usually require a guarantee when granting a loan
- Public Administrations: they usually require a guarantee when they enter into a contract with an individual.
What is a mortgage guarantee?
In a mortgage loan, the guarantor is the person who will assume the debt using their assets in the event of a default. If the mortgaged holder fails to pay the amount, the bank will claim this debt from the guarantor who must settle the debt using their present assets and, if necessary, with their future assets. To claim the debt against the mortgage loan guarantee, the bank must prove that the mortgage holder is unable to meet the mortgage loan payment.
It is important to bear in mind that a guarantee in a mortgage loan will be linked to the debtor for the entire loan period.