What is a 'Guarantor'

A guarantor is a person who guarantees to pay for someone else's debt if he or she should default on a loan obligation. A guarantor acts as a co-signer of sorts, in that they pledge their own assets or services if a situation arises in which the original debtor cannot perform their obligations.

A guarantor is also someone that certifies to the true likeness of an individual applying for a product or service.

Also known as a Surety.

BREAKING DOWN 'Guarantor'

A guarantor is usually someone over the age of 18 and is required to be a resident in the country where the payment agreement is made. The guarantor is expected to have a good credit history and sufficient income to cover the loan payments if the need arises. Once a guarantor enters an agreement, the contract will remain binding until the end of the period of repayment.

A guarantor could be the same person applying for the loan. In this case, s/he acts as a guarantor by guaranteeing the loan with security in the form of any asset that s/he owns. However, in most situations, a third party guarantor is what is requested depending on the financial circumstances of the borrower.

A guarantor is usually required when a person is needed to either confirm that a borrower can pay his debts in the event that a loan is approved for him or her or needed to verify the identity of another person.

Usually, people or businesses with poor or limited credit history can only get a loan if they have a guarantor. For example, an individual with a comparatively low credit score looking to obtain a line of credit to cover unforeseen expenses may be required by the bank to find a guarantor before the bank will issue them the line of credit. Car loans, mortgages, business loans, student loans, etc. are all examples of loans where a guarantor may be required to assume credit liability in the event of default.

The guarantor guarantees the loan by putting up his assets as collateral. If the borrower makes his payments in a timely manner and never defaults, the guarantor would not have to take any action or owe any money to the lender. However, if the borrower cannot make good on his loan payments, the guarantor takes on the responsibility. In addition to making the scheduled payments, the guarantor may also be required to cover any costs or interests that were incurred from the borrower’s late payments. If the guarantor cannot cover the debt, the assets that s/he pledged as security for the loan will be sold to cover the remaining debt.

A guarantor can be limited or unlimited in his financial responsibilities under the loan agreement. A limited guarantor is one who is limited to time or amount. The guarantor may be asked to guarantee a loan only up to a certain time at which point the borrower will be fully responsible for payments and defaults. A limited guarantor may also only secure a portion of the principal amount of the loan including interests and fees, as opposed to an unlimited guarantor who is liable for all amounts due and owing to the lender.

Guarantors are not only requested when the borrower has poor credit history. First time property renters are usually asked to provide a lease guarantor by the landlords or property managers. Students are more likely to fall into this category with their parents or close relatives acting as guarantors on the rental or lease agreement. The lease guarantor guarantees that in the event that the tenant is unable to continue paying his rent or breaks his lease agreement, the guarantor will assume the responsibility for the payments until the lease is over or given to someone else in a sub-lease contract.

In the event of default, the guarantor’s credit history may be negatively affected which could limit their chances of getting loans or any type of credit form a lending institution in the future. It is therefore, imperative that the guarantor understands what he is signing on and the responsibilities that he may be required to take on.

A guarantor differs from a co-signer. A co-signer is co-owner of the asset and has his or her name on the ownership document. The guarantor has no claim to the asset purchased by the borrower under the loan agreement, and only guarantees payment of the loan. The lender will normally ask for a co-signer if the borrower’s qualifying income is not up to par with the lender's requirement. The co-signer’s additional income would help bridge the income gap. Under the guarantor agreement, the borrower may have sufficient income but limited or poor credit history.

A guarantor is not only used in a financial context. When a person is applying for a service such as a job or a passport, a guarantor may be requested. In this case, the guarantor certifies that they know the applicant and that the applicant is really who they say they are by confirming photo IDs and signing documents.

 

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