What is a guarantee and what is its role in the banking context?

What is an endorsement and how does it work

At the time of requesting a loan, you may wonder what a guarantee is. And, among the different types of personal loans that exist, some of them request a guarantee as a mandatory requirement to be able to grant you financing.

Therefore, it is important that you familiarize yourself with this concept if the idea of ​​applying for a personal loan appears in your next plans. Whose determining requirement is this document, because if you do not present it you will not get the money.

In this post we tell you what a guarantee is, how it works, what it is for and what types exist . Since in the financial industry there is a diverse typology of guarantees.

What is a collateral in the context of financial loans?

A guarantee is a payment guarantee that supports the fulfillment of an economic obligation. This concept is applicable to any debt you incur.

But how does it work in the context of financial loans? If you cannot meet the loan installments in a timely manner, what you have presented as collateral will cover part of the debt contracted with the banking institution.

The need to impose this condition, on the part of the financial institution, derives from the non-payment of the installments of a bank loan. It is a backup against financial insolvency that prevents you from meeting your financial commitments.

This does not mean that, given the minimum delay, the lender will absorb the guarantee. Remember that all personal loans are different and are subject to different conditions - different clauses. Therefore, before signing it, you should read the document very carefully so that you consider the magnitude of the commitments.

How this guarantee works

Let's review a hypothetical case to understand what a collateral is in the banking context:

  • María, a 23-year-old girl, has applied for a $ 10,000 loan from a financial institution to pay for her professional studies.
  • After completing her application, the lender has detected that María does not have a sufficient financial balance to guarantee the absolute repayment of the loan in a timely manner.
  • Therefore, the entity requests a guarantee from María as a guarantee on the loan that it is going to grant to the young woman.
  • In the event that María is unable to pay off the debt, the guarantee that she has specified will be in charge of assuming the financial commitment . It can be a person, real estate or any other valuable asset.
  • If the guarantor is a person, let's call him Roberto, it is most likely that the lender will request a sample that Roberto has the financial solvency to face Maria's debt.

What is a guarantee for?

In whatever context a guarantee is placed, it serves as a guarantee that supports the fulfillment of obligations . They are cheap or not.

This is a requirement that, depending on the type of personal loan you select, you must meet for the lender to consider your request.

infographic - what is a guarantee

Otherwise, even if you meet the rest of the conditions, your request will be rejected. Well, the lender or the institution that is going to grant you the money needs to have a guarantee that you will pay the debt. And, in the event that you cannot do so, another person or a property can rectify the economic commitment acquired.

It is important to bear in mind that, if you default on an obligation contracted with a banking institution, you could become part of the list of defaulters. This will already depend on the actions that the lender decides to execute.

Most popular types of collateral

Far from what you can think about what a guarantee is, not only one person (guarantor) can be the one who offers to pay the debt in the event that your insolvency prevents you. There are other options that you can also consider and that are valid before the lenders :

Personnel: one person is the guarantor

It is the best known option. A person would act as guarantor of your loan , that is, the person responsible for meeting your financial commitments.

In this sense, if you cannot respond to the debt, the bank or the lender will contact the guarantor to make him responsible for the commitment.

Property: an own asset is the guarantee

It is also a very well known and used option. The guarantee would be a good or a property that you put as a guarantee of payment in case you default on the repayment of the debt. It can be a car or a property (which you own).

If you have a vehicle in your name, you can apply for a loan for your car .

Banking: a bank supports the debt

It consists in that a bank , with which you have a good financial history, presents itself as the guarantor of your debt . In this special case, you would have to apply for the loan in a different entity that supports this option.

Solidarity: one person guarantees all debts

It is a legal figure through which the guarantor responds for all the commitments that the guarantor has contracted in a certain business. Or, in the case of financial loans, debts with the bank.

Are secured loans the only alternative?

Endorsement in the context of online loans

No! Endorsed loans are an option offered by banking institutions.

In some cases, the guarantee is requested more frequently from people who are or have been on a list of defaulters (such as Credit Checker). Or when it comes to a large amount of money. Also in case you do not have a stable financial solvency.

Either way, you can also opt for loans without endorsement . They are financing with more flexible requirements . Of course, they also include conditions that you must review to decide if they are an option that fits your financial needs.

Loans without collateral are simpler operations with less paperwork and whose approval can be faster . In the market you can find lenders who offer minimum amounts up to high amounts.

In case you are looking for a loan, you can rely on the Taichi Arts rankings to compare various offers and choose the one that best suits your financial needs.

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