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What is a Guarantee Agreement?

A guarantor or co-signer agrees to make payments on a loan if a borrower cannot make them.
People with poor credit may be involved in a guarantee agreement for the purposes of purchasing a car or renting a home.
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  • Written By: Tricia Ellis-Christensen
  • Edited By: O. Wallace
  • Last Modified Date: 16 October 2014
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A guarantee agreement is usually made during a loan, or a real estate transaction. It tends to involve a third party who will step in and make necessary payments if the main person obtaining a loan or renting a property cannot make payments. The third party is called the guarantor, or sometimes co-signer.

Often, student loans are part of a guarantee agreement. They assert that the government guarantees repayment of a loan. If the student defaults for any reason, the bank lending the money will get its money from the government, and the government will be responsible for attempting to collect the debt from the student.

People with poor credit may be involved in a guarantee agreement for the purposes of purchasing a car or renting a home. Often they use someone with good credit, perhaps their parents or a sibling, as co-signers so such an agreement can be made. This is a bit of a double-edged blade. If the person cannot meet his financial obligation, the financial obligation is transferred to the guarantor. So for example, if a person does not make rent payments, the parent or sibling must make them.

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The term guarantee agreement may also be used in the context of people being offered a guarantee of satisfaction upon the purchase of goods or services. Such an agreement may be easy to enforce, or very difficult for the consumer. For example, most products on infomercials that offer a money back guarantee may have a guarantee agreement that is somewhat challenging to enforce. This is because production companies may be very small, or because money back guarantees have a certain time period.

In general, most large companies that offer a money back guarantee agreement will honor their obligations. So for example, things purchased on TV channels like the Home Shopping Network are fairly easy to return if they are unsatisfactory. However, an agreement of this type is generally not a signed agreement, as is the first type defined here. Therefore, it may still be harder to enforce guarantees of satisfaction, and may prove costly to return purchases that do not fulfill their promises.

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Bakersdozen
Post 4

I bought my first home with help from my parents. We did everything very officially, filling out guarantee agreement forms and taking out insurance to help pay off the debt, should something bad happen.

It really is a major thing to do, after all, who wants to risk making their family homeless if circumstances change? I'm forever grateful for having a mother and father who were able and willing to take this chance on me.

Potterspop
Post 3

@hoangminh - To all extents and purposes you should consider a personal guarantee agreement as a contract between two people. I say this because the lender will approach it this way.

Their obligations are limited to the usual bank guarantee guidelines. Believe me when I say that they are looking at what the named borrower has to offer in terms of security against a loan.

The guarantor should seriously consider if they are really happy about shouldering this kind of responsibility, as the buck will stop with them.

The borrower has a moral obligation to pay back the money, but are unlikely to be pursued legally should they default. It's quite common for the bank to go straight to the guarantor, and bypass them altogether.

anon28985
Post 2

Can a guarantee reduce credit risk?

hoangminh
Post 1

What are obligations of the lender, the borrower, and the guarantor in the guarantee agreement?

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