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.

 

RELATED TERMS
  1. Financial Guarantee

    A financial guarantee is a non-cancellable indemnity bond backed ...
  2. Guaranteed Bond

    A guaranteed bond is a debt security that offers a secondary ...
  3. Accommodation Paper

    An accommodation paper is a third-party pledge to assist in the ...
  4. Joint Bond

    A joint bond, or a joint-and-several bond, is one where interest ...
  5. Unsecured Loan

    An unsecured loan is a loan that is issued and supported only ...
  6. Loan Officer

    A loan officer is a representative of a bank, credit union or ...
Related Articles
  1. Personal Finance

    Getting your name off a cosigned loan

    If your friend or relative has proved to be irresponsible, getting out of the cosigned loan can improve your financial security and options for borrowing.
  2. Personal Finance

    6 Roads to a Personal Loan with Bad Credit

    Borrowing is definitely doable. Here's how to proceed.
  3. Personal Finance

    How To Apply For a Personal Loan

    Learn about different avenues for applying for a personal loan, and learn valuable tips to help you get your personal loan application approved.
  4. Personal Finance

    Personal Loans vs. Car Loans

    How to tell whether a personal loan or a car loan is better for you.
  5. Personal Finance

    Personal Loans: Consider These Alternative Lenders

    Looking for an alternative source of financing for a personal loan? Take a look at these companies.
  6. Managing Wealth

    When Are Personal Loans a Good Idea?

    You never want to borrow money for frivolous reasons, but these five circumstances might warrant it.
  7. Personal Finance

    Home Improvement Loans: What Are Your Best Options?

    If you plan on taking out a home improvement loan, you should know what your options are and which ones might be best for your situation.
  8. Personal Finance

    8 Cheaper Ways to Raise Cash Than Car Title Loans

    Before you sign up for a car title loan, investigate these eight alternate cash-raising strategies rather than using the value of your lien-free vehicle.
  9. Personal Finance

    Getting a loan without your parents

    Do you want to receive a loan without the help of your parents? Use these five tips to finance your dreams without banking on a second signature.
  10. Retirement

    Business Owners: A Guide To Qualified Retirement Plan Loans

    Thinking of adding a loan feature to your company's plan? Here's what you need to know.
RELATED FAQS
  1. Can personal loans be transferred to another person?

    Learn whether it is possible to transfer a personal loan to another person, and find out what happens when you default on ... Read Answer >>
Trading Center