What is a bank guarantee? Do not rent your house without a guarantee

Let’s start by defining what an endorsement is . A guarantee is a guarantee where in case of non-compliance with a payment, this will be made by a guarantor who takes charge of the financial obligations of the guaranteed before a third party.

What is a bank guarantee?

In the bank guarantee, it indicates that it is the bank that serves as a guarantee at the request of the applicant at the time of non-compliance with a payment by the latter to third parties. In short, the bank becomes a guarantor and will answer for the applicant for the guarantee in the event that the latter cannot make the payment agreed with a third party.

Bank guarantees are very common in rental contracts.

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How does the bank guarantee work in rentals?

Bank guarantees are very common in rental contracts, since owners obtain more security when collecting rent and this works as payment insurance in case a tenant does not pay.

A tenant who provides a bank guarantee in favor of the owner will add points to his candidacy. The amount of the guarantee will be negotiated between the tenant and the owner and is usually established for a number of monthly installments. The granting of the guarantee implies for the tenant the payment of a series of commissions, such as study, formalization and monthly or annual.

Some tenants take advantage of this situation to negotiate a decrease in their rent by giving more solidity with the payment. Thanks to the contracting of a bank guarantee, the owner sees the risk that he must assume reduced. The fact of exposing yourself to not collecting the monthly installments is minimized, since you can resort to the guarantee if a default occurs on the part of the tenant. However, if you are a homeowner, you should know that nowadays the guarantees for them to be truly effective must be for the equivalent of twelve monthly payments, an amount that not all tenants are willing to contribute. This is due to the fact that, unfortunately, eviction processes are currently taking more than 12 months on average.

What are the requirements to obtain a bank guarantee?

The bank, by taking responsibility for a possible future debt of the applicant, also runs a risk. As in the loans, it will request a series of requirements from the tenant that, normally, are the same as those required in any banking operation. Being a client of the guarantor bank for several years will help to obtain said guarantee. The bank will analyze your solvency level, payment compliance and available funds. If everything is in order, there is a good chance that it will guarantee the amount requested.

It is possible that one of the conditions for the tenant will be to enter the amount of the guarantee and leave it immobilized, since in this way the bank has no risks.

The applicant for the guarantee must pay a monthly or annual amount to the bank that guarantees it in order to cover a default when necessary. It is important to note that, normally, the value of these commissions usually ranges between 0.5% and 1%.

You must also provide the specific information of the property you want to rent, the owner and the amount of the guarantee.

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Types of bank guarantees.

Banks can vary the conditions and clauses of the guarantees they offer based on different parameters and values, but these are the main ones:

• Technical guarantees : The bank takes charge of all the client’s obligations, whether in contests, auctions, non-payment of rents and more.
• Financial guarantees : The bank will ensure compliance with the client’s obligations only up to a certain amount and a certain term.

How does the owner collect the bank guarantee in the event of non-payment?

If during the established period of time, the tenant and applicant for the guarantee does not comply with what was agreed in their rental contract, the landlord or owner may request the bank to pay those monthly payments.

The first thing is to determine if said guarantee to be executed is a guarantee on first demand or not.

If it is a guarantee on first demand, it will suffice to notify the guarantor bank in a reliable manner without the need to prove the debtor’s default. This makes the payment immediate. Otherwise, for guarantees that are not on first demand, the owner must prove the tenant’s non-payment and it will be a longer process.

Today there are alternatives to this guarantee, such as hiring a company that offers you a rental with guaranteed income. You can learn more about this at this link.

Written in collaboration with Pablo Quintero