Guarantee Agreement Definition: Everything You Need to Know
A guarantee agreement is common in real estate and financial transactions. It concerns the agreement of a third party to provide assurance of payment.3 min read
Updated November 6, 2020:
A guarantee agreement definition is common in real estate and financial transactions. It concerns the agreement of a third party, called a guarantor, to provide assurance of payment in the event the party involved in the transaction fails to live up to their end of the bargain. For instance, if a homeowner fails to pay the mortgage, the bank will look to the guarantor to make good on the mortgage agreement.
A guarantee agreement is often common in loans for college tuition, where the government acts as the guarantor. In this case, should the student default on the loan, the bank will turn to the government to collect the outstanding loan debt.
Individuals with poor or no credit often seek the help of someone with good credit to act as a guarantor. This happens quite often in real estate when a son or daughter who has not yet developed a sufficient credit rating gets their parents with good credit to help get better terms from a financial institution and make the property affordable.
The guarantor always assumes a risk, in fact, all the risk, because if the child fails to make the agreed payments, responsibility for paying off the loan falls onto the parent. The risk is exacerbated because parents are unlikely to set stringent conditions for providing the guarantee of payment, such as a collateral agreement that they might enter into if they were involved in a financial transaction with anyone else.
The Guarantee Agreement Form
Using a guarantee agreement form formalizes your agreement by setting out the terms under which you will provide financial backing for the repayment of a loan or debt. This assures that a lease or mortgage will be paid or credit card charges paid off. Important provisions found in a guarantee agreement form include:
- Agreement with the third party providing a financial guarantee, including signatures.
- Agreement on the part of the guarantor to fulfill the promises of the borrower.
- Payment terms and amount of loan or debt guaranteed.
- Form of repayment, because the guarantor can put up any form of collateral, including goods or services.
- Stipulation that the guarantee can only be acted on in the event of a contract breach.
Guarantees Agreements and Consumers
Most consumers encounter guarantee agreements when they purchase a product or engage someone to perform a service. Depending upon the level of the guarantee, enforcing can be very easy or quite difficult.
Companies can attach time periods to product guarantees that limit the purchaser’s ability to return a product for a refund. How often have you had a product break down only to discover that the warranty has just expired? Even though manufacturer warrant laws in place to protect you from unscrupulous businesses, it seems the companies know exactly how long their product will work to avoid liability.
However, even though these guarantees are not signed by either party and may even be oral in nature, most businesses understand the goodwill generated by adhering to stated guarantee policies. This is especially true for companies that sell products online or on television, who know that keeping the customer happy is important for repeat business and are willing to accept returned items as just a matter of doing business.
Types of Guarantees
Several forms of guarantee exist and provide varying levels and responsibilities of the guarantor and avenues for remedy for the creditor. These include:
- Absolute Guarantee. An absolute guarantee has no conditions that restrict a creditor from immediately moving to assume relief if the party that agreed to the initial deal defaults on the contract. Without the conditions, a guarantee is automatically assumed to be absolute.
- Conditional Guarantee. In the event the parties enter into an agreement that contains a conditional guarantee, it takes more than just the default on the debt to trigger the guarantor’s responsibility to repay the debt. It requires action on the part of the creditor in some aspects.
- Payment Guarantee. This guarantee creates an obligation of the guarantor to pay the creditor when the debt comes due if the borrower defaults at that time. It occurs automatically at a fixed date upon the default.
- Collection Guarantee. A collection guarantee assures the creditor that after all other reasonable efforts
Other types of guarantees include a performance guarantee, a continuing guarantee, and a restricted guarantee.
In the event you are asked to take on the role of a guarantor, take the time to determine the right guarantee you will agree to provide.
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