Loan suretyship

When a loan guarantor is required

According to Article 361 of the Civil Code of the Russian Federation, upon concluding a surety agreement, the guarantor assumes responsibility for the full or partial payment of the debt on the borrower's obligations. As a rule, an individual can act as a guarantor, much less frequently entrepreneurs.

A guarantor is a type of surety, therefore they are not required when issuing small loans. On the contrary, they are necessary for large loans worth from RUB 1 million or when the lender is not confident in the client's creditworthiness. Thus, surety is usually required in the following cases:

1. With negative or zero credit history of the borrower. The bank may have doubts about the client's solvency if they have previously allowed overdue payments on loans and borrowings. Moreover, the lack of credit history in this case will not be an advantage either.
2. Large loan amount. The larger the loan, the greater the risks for the lender, so it is natural that in such a case the bank requires the presence of a guarantor. This is either a guarantor or collateral property.
3. Low borrower income.

Who can become a guarantor

The list of guarantors is not established by law, so the requirements a guarantor must meet are entirely up to the bank. Naturally, these may vary somewhat depending on the chosen institution. However, after analyzing the requirements of several leading banks, we have identified the following:

1. Solvency. In this regard, the requirements for the guarantor are the same as for the borrower. The guarantor's income must be sufficient to repay the debt. If the guarantor is an entrepreneur, it is important to the banks that their business is not operating at a loss.
2. Age. As a rule, a guarantor cannot be under 21 years of age. Much less frequently, banks allow 18-year-old citizens to become guarantors.
3. Place of residence. In this case, both the primary borrower and the guarantor must reside in the same region where the lending institution's branch is located.
4. Good credit history. Past overdue payments and loan defaults can be grounds for refusing to act as a guarantor.
5. For some institutions, it is essential that the guarantor is a relative of the borrower.
6. No criminal record.
7. No active loans, meaning no debt burden.

It is worth noting that a refusal to act as a guarantor does not equal a loan refusal. In this case, the bank will approve the loan application and simply ask to replace the guarantor.

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What is the difference between a co-borrower and a guarantor

The main difference between these individuals lies in their liability to the bank. While a guarantor is someone who takes on the borrower's obligations if the latter cannot repay the loan for any reason, a co-borrower is an equally responsible party as the primary client. That is, they are obligated to repay the loan to the same extent as the primary borrower.

There is also a difference in rights. A guarantor merely assumes liability to the bank and cannot claim the borrower's property that serves as the loan collateral under any circumstances. Meanwhile, a co-borrower legally has the right to a share of this property.

Duties of a loan guarantor

All liabilities of the guarantor are outlined in Article 363 of the Civil Code of the Russian Federation:

1. In the event of non-performance or improper performance of the borrower's obligations, the guarantor bears joint and several liability to the bank.
2. The guarantor bears the exact same responsibility as the borrower. That is, they undertake to pay the principal debt, interest, fines, penalties, and legal costs.
3. If there are multiple loan guarantors, the bank may demand performance of obligations from each of them equally.

In addition, the guarantor undertakes to fulfill all requirements of the creditor. This means they are obliged to provide all necessary certificates and documents at the bank's first request, notify the institution of any changes in financial standing, report changes of residence, the initiation of criminal proceedings or seizure of property, the acquisition of a disability or loss of working capacity, and so on.

Rights of a loan guarantor

The rights of the guarantor are governed by Articles 364 and 365 of the Civil Code of the Russian Federation. Prior to fulfilling obligations, the guarantor may rely on:

1. Submitting objections to the creditor's demands.
2. Non-performance of the obligation to the bank if the institution can recover the debt from the borrower.
3. After the borrower's death, the guarantor is likewise liable to the bank only if the agreement contains a clause stating that the guarantor is responsible for each new debtor.

After full repayment of the debt, the guarantor has the right to demand compensation for the full amount of incurred losses from the debtor through the court.

Grounds for termination of surety

The law provides for the following cases for the termination of a guarantee:

1. Full repayment of the loan by the borrower.
2. Changes to the loan agreement without the guarantor's consent that provide for an increase in the guarantor's liability.
3. Change of borrower without the guarantor's consent.
4. Refusal by the creditor to perform duties regarding the principal debtor or guarantor and unilateral modification of the loan agreement terms.
5. Upon expiration of the period specified in the guarantee agreement. If no such period is specified, all obligations terminate 12 months from the moment they arise, provided the creditor has not made claims against the guarantor.
6. If the borrower was a legal entity that ceased its operations.

Note.

The guarantee agreement must contain a clause on its validity period. If there is none, the agreement loses force one year after full loan repayment.

In what cases can a guarantor refuse their obligations

According to the Civil Code of the Russian Federation, a guarantor can refuse to fulfill their obligations in the following cases:

1. When the actual loan term and the term specified in the agreement do not match.
2. If the creditor has failed to fulfill their obligations under the agreement, i.e., has not provided the loan funds.
3. If interest on the principal debt was accrued incorrectly. For example, if the actual loan interest exceeded what was stated in the agreement.

It should be noted that you cannot refuse a guarantee unilaterally. Any obligations of a third party to the agreement can only be removed through a court and upon presentation of evidence. There have also been situations where a guarantor satisfied the bank's demands on par with the primary borrower. In such cases, they also went to court to recover the overpaid amount from the creditor.

Acting as a guarantor is a serious step. By signing the agreement, a potential guarantor must realize that in the event of default by the borrower, all obligations will fall squarely on them. Therefore, when deciding on this step, evaluate your income and your willingness to bear responsibility for another person.