Loan Guarantees: What You Need to Know

When you take out a loan, whether it's a mortgage, consumer loan, or business loan, the bank or credit institution often requires guarantees to protect themselves in case of payment default. These guarantees secure the repayment of the credit by providing additional insurance to the lender. This article explores the main forms of guarantees, their advantages, and points to consider when choosing a guarantee for a loan.

What Is a Loan Guarantee?

A loan guarantee is a protection required by the lender to ensure the repayment of the credit in case of borrower default. In case of missed payments, the lender can use the guarantee to recover all or part of the loan amount. Guarantees can take different forms, depending on the type of loan and the specific needs of the borrower.

Main Forms of Guarantees

There are several types of guarantees for loans, each adapted to specific situations:

• Mortgage: The mortgage is the most common guarantee for real estate loans. It involves a registration on the financed property, allowing the bank to seize and sell the property in case of loan default. Mortgage fees include notary fees and land registration taxes.
• Guarantee: The guarantee is an alternative to the mortgage, often used for real estate and consumer loans. The guarantee can be provided by a guarantee company or a third party. In case of borrower default, the guarantor undertakes to repay the loan. Guarantee fees are generally lower than those of a mortgage.
• Privilege of Lender of Money (PPD): The PPD is a guarantee similar to a mortgage, but reserved for real estate loans for the purchase of existing properties. Less expensive than a mortgage, the PPD allows the lender to recover their due priority in case of forced sale of the property.
• Pledge: The pledge is a guarantee on movable property (savings accounts, securities portfolio, etc.). In case of non-repayment, the lender can seize the pledged assets to recover the loan amount.

Advantages of Loan Guarantees

Guarantees offer several advantages, both for lenders and borrowers:

• Securing the loan: For lenders, guarantees reduce the risk of non-repayment, which can allow them to grant loans on more favorable terms (reduced interest rates, longer duration, etc.).
• Access to financing: For borrowers, guarantees make it easier to access financing, especially in cases where the borrower's financial profile is considered risky by lenders (fluctuating income, lack of down payment, etc.).
• Choice of guarantees: Depending on the nature of the loan and the specific needs of the borrower, it is possible to choose from several types of guarantees, each with different costs and implications.
• Borrower protection: Some guarantees, such as a guarantee, provide additional protection to borrowers in case of financial difficulties, avoiding the seizure of their property.

Points to Consider Before Choosing a Guarantee

The choice of guarantee should be made carefully, taking into account several factors:

• Cost: The cost of the guarantee varies depending on its type. For example, mortgage fees can represent up to 2% of the loan amount, while guarantee fees are often lower.
• Loan duration: The loan duration can influence the choice of guarantee. For a short-term loan, a guarantee may be more advantageous than a mortgage, which involves higher fees.
• Nature of the property: The type of financed property (real estate, movable) also determines the most suitable guarantee. Real estate loans are generally guaranteed by a mortgage or a PPD, while consumer loans can be guaranteed by a pledge.
• Associated risks: Each type of guarantee carries specific risks. For example, in case of foreclosure, the borrower loses their real estate property, while with a guarantee, the guarantor may be pursued to repay the loan.

Real-Life Examples

Let's assume a borrower takes out a €200,000 real estate loan with a mortgage as collateral. If the borrower fails to repay the loan, the bank can seize and sell the property to recover the remaining amount. On the other hand, if the borrower had opted for a guarantee, the guarantee company would have taken care of the repayment, with possible recourse against the borrower.

Laws Regulating Loan Guarantees

Loan guarantees are regulated by the Civil Code and the Monetary and Financial Code. These texts specify the conditions for the validity of guarantees, the rights and obligations of borrowers and lenders, as well as the procedures in case of non-repayment of the loan. It is essential to understand these provisions before taking out a guarantee.

Conclusion

Guarantees are an essential element to secure a loan, for both lenders and borrowers. By choosing the most suitable guarantee for your situation, you can obtain more favorable financing terms while protecting your interests. Before taking out a guarantee, it is recommended to fully understand the implications and consult a financial advisor if necessary.