What is a guarantee? Why do banks need a guarantee?

A guarantee is a legal contract that binds you to pay the debt of the borrower if the borrower fails to do so.

The financial institution can sue you when the borrower does not pay back his or her debt.

A financial institution may require a guarantee as a means to enhance the credit standing of the prospective borrower and thus enabling him or her to obtain financing.

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Reprinted with permission from BankingInfo (A Consumer Education Programme)

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