Guarantor Definition – Loan Basics
What Is a Guarantor?
A guarantor is a person who guarantees to pay a borrower's debt in the event the borrower defaults on a loan obligation. A guarantor acts as co-signer because they pledge their own assets or services in case the original debtor cannot perform their obligations.
A guarantor is also someone that certifies the true likeness of an individual applying for a product or service. A guarantor is also known as a surety.
Understanding the Role of a Guarantor
A guarantor is usually over the age of 18 and a resident of the country where the payment agreement applies. 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 repayment period.
If property is used by the guarantor as security for the loan, it should be a property that will be retained for the long term. It can be complex and costly to remove a guarantee to sell a property.
An individual can act as her own guarantor. In this case, the person guarantees the loan with security in the form of an asset that she owns. However, in most situations, a third-party guarantor is required depending on the financial circumstances of the borrower.
A guarantor is necessary if the borrower must demonstrate that their debt will be paid or if the identity of a person requires verification.
Qualifying for a Loan With a Guarantor
Individuals or businesses with a poor or limited credit history may only qualify for a loan if they have a guarantor. For example, an individual with a comparatively low credit score who is seeking a line of credit to cover unforeseen expenses may be required by the bank to find a guarantor before the bank will issue them a line of credit. Car loans, mortgages, business loans, and student loans 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 their assets as collateral. If the borrower makes payments promptly 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 the loan payments, the guarantor takes on the responsibility of the debt. In addition to making the scheduled payments, the guarantor may also be required to cover any costs or interests incurred as a result of the borrower’s late payments. If the guarantor cannot cover the debt, the assets pledged as security for the loan will be sold to cover the remaining debt.
A guarantor can be limited or unlimited in their financial responsibilities under the loan agreement. A limited guarantor is limited by 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. Also, a limited guarantor may 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 to the lender.
Contexts in Which a Guarantor May Be Required
Borrowers with a poor credit history are not the only people who may require a guarantor. First-time property renters are often asked by landlords or property managers to provide a lease guarantor. Students are more likely to fall into this category, and their parents or close relatives often act as guarantors on the rental or lease agreement.
The lease guarantor agrees that if the tenant is unable to continue paying rent or breaks the 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.
- A guarantor guarantees to pay a borrower's debt in the event the borrower defaults on a loan obligation.
- A guarantor is also someone who verifies the identity of a person—for example, in the case of a passport application.
- The guarantor guarantees a loan by putting up their assets as collateral.
- Unlike a co-signer, a guarantor has no claim to the asset purchased by the borrower under the loan agreement and only guarantees payment of the loan.
A guarantor differs from a co-signer. A co-signer is a co-owner of the asset, and their name will appear 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 less than the lender's requirement. The co-signer’s additional income bridges the income gap. Under the guarantor agreement, the borrower may have sufficient income but a limited or poor credit history.
A guarantor is used in many contexts such as financing and job or passport applications. For job and passport applications, 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.
Fast Fact: 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 the responsibilities involved when they sign an agreement.