When granting a loan, a bank requires either a guarantor, collateral, or sometimes both, to protect itself from risk. These two concepts are often confused, yet their obligation, risk and consequences are entirely different. In this article we explain the difference between a guarantor and collateral, the responsibility each carries, and what is required for which loan.
What is a guarantor?
A guarantor (guarantorship) is a third party who is liable for payment if the borrower fails to repay the loan. The guarantor does not directly pledge their property to the bank, but the moment they sign they take on personal responsibility for the debt. If the borrower does not pay, the bank can demand it from the guarantor, and this may mean the guarantor paying out of their own income and property.
What is collateral?
Collateral is a specific piece of property pledged to the bank as security for the loan: an apartment, a car, land, a deposit or another valuable asset. If the debt is not repaid, the bank gains the right to legally sell the pledged property to cover the debt. That is, with collateral the risk is tied to a specific item — not to all your personal property, only to the pledged asset.
The obligation each carries
As soon as a guarantor signs, they effectively take on the risk almost "in their own name." If the borrower does not pay, the bank turns to the guarantor and the guarantor must continue the payments. This can also affect the guarantor's own credit history: if a late payment occurs, the record may also appear in the guarantor's register. The owner of collateral, on the other hand, puts their property at risk — if the debt is not settled, that property can be sold, but their other property and income are not directly affected.
Risks: who can lose what?
- For the guarantor: part of their income can be seized, their credit history can be damaged, and their own future borrowing can become harder.
- For the collateral owner: the main property (apartment, car) can be lost, but liability is limited to that asset alone.
- For the borrower: with a collateralised loan they put their property at risk, and with a guaranteed loan they put the relationship with the guarantor at risk.
Which bank requires what?
The security required depends on the type and amount of the loan:
| Loan type | Usually required |
|---|---|
| Small consumer loan | Often unsecured (income certificate only) |
| Medium-sized cash loan | One or two guarantors |
| Car loan | The car itself is pledged as collateral |
| Mortgage | The purchased apartment is collateral, sometimes an additional guarantor |
| Business loan | Real estate collateral and/or a guarantor |
What to check before becoming a guarantor?
The decision to stand as a guarantor for someone's loan should be calculated, not emotional. Clarify the following:
- What is the total amount of the debt and the monthly payment?
- Is the borrower's income stable and is their ability to pay realistic?
- If they cannot pay, can you cover this amount from your own budget?
- How is the guarantor's limit of liability defined in the contract?
Which is less risky for you?
Looked at as a borrower, a collateralised loan often comes with a lower interest rate, because the security is specific for the bank — the risk is low. A guaranteed loan, on the other hand, requires finding a guarantor and can strain relationships. Looked at as a guarantor, the least risky option is generally not to stand as a guarantor at all; if it is truly necessary, agree only for an amount you can pay and only for someone you know well and whose ability to pay is strong.
Conclusion
A guarantor means personal responsibility, while collateral means security with a specific piece of property — the risk and consequences of the two are different. When taking out a loan, clarify in advance which security is required and which is more favourable for you. To compare unsecured or minimum-requirement loan options, you can look at our consumer loan page.
