What does being a guarantor mean? Being a guarantor involves helping someone else get credit, such as a loan or mortgage. By acting as a guarantor, you “guarantee” someone else’s loan or mortgage by promising to pay back the loan if they can’t afford it. It’s wise to agree to be a guarantor for someone you know very well.
A guarantor is a person who acts as a secondary source of support for a borrower in the event that the borrower is unable to make loan or credit payments. The guarantor acts as a “co-signer” of the loan and is responsible for repaying the loan if the borrower defaults on their payments.
Here’s how a guarantor typically works:
- The borrower applies for a loan or credit and is required to provide a guarantor as a condition of approval.
- The guarantor is required to provide their personal information, including their income and credit history, as well as their agreement to act as a guarantor for the loan or credit.
- The lender uses the information provided by the borrower and the guarantor to determine the loan or credit risk level.
- If the borrower is unable to make their payments, the lender will first try to collect from the borrower. If the borrower is unable to make payments, the lender will then turn to the guarantor to make the payments.
- The guarantor is fully liable for the debt, and the lender has the right to take legal action against the guarantor if the loan or credit is not repaid in full.
It’s important to note that being a guarantor is a serious responsibility and should not be taken lightly. It’s important for a guarantor to fully understand the terms of the loan or credit and to be able to make the payments if they are required to do so.
key takeaways
- Guarantors guarantee the loan taken by the primary borrower.
- To guarantee a loan means to agree to repay the amount borrowed if it is necessary to do so.
- A guarantee may be conditional, meaning that the guarantor is only liable for the loan under certain circumstances.
- A guarantee may also be unconditional, meaning that the guarantor will share equal responsibility for payment with the primary borrower.
- Guarantors may be required for many types of loans, including credit cards, car loans, personal loans, and student loans.
Guarantor definition and examples
Lenders evaluate the financial creditworthiness of a potential borrower. A guarantor may be required if a borrower cannot qualify for the loan on their own based on their credit history, income, age, or other factors.
A guarantor will also apply along with the primary borrower. The lender will also consider the financial creditworthiness of the guarantor. The guarantor will agree to share the legal responsibility for repayment. Because the lender can collect from the guarantor, the loan is less risky for the lender and the likelihood of loan approval is higher.
In some cases, the guarantor is held responsible for repayment only after the lender has made every effort to collect payment from the primary borrower.
An example of a guarantor might be when someone under the age of 21 applies for a credit card but is unable to provide proof that they are able to make the minimum payment on the card. The card company may require a guarantor, who becomes liable to repay any charges on the credit card.
Guarantors are also used for leases. It is common for the parents of young tenants to co-sign the lease.
How guarantors work
The guarantor can be used for all types of loans including credit cards, leases, personal loans, and auto loans. However, not all lenders allow guarantors.
When a lender allows for a guarantor, the guarantor provides their financial information, and the lender assesses their ability to repay the loan. A guarantor must have good credit, a good income, and plenty of assets – otherwise, they may not be considered a good candidate to guarantee repayment of the loan.
The guarantee agreement should specify the circumstances under which the guarantor will be responsible for paying the debt of the primary borrower.
Types of guarantors
Guarantees are divided into two types:
- Conditional Guarantees: With conditional guarantees, certain conditions must be met before the creditor can attempt to collect money from the guarantor. The guarantee may be limited to a specific amount or transaction, either interest or principal, or it may be limited in time.
- Unconditional Guarantee: With an unconditional guarantee, the guarantor’s responsibility for the loan is the same as that of the primary borrower.
Do I need a guarantor?
A borrower may require a guarantor if the borrower himself cannot qualify for the loan. Borrowers with a limited credit history or low credit score may require a guarantor, as may borrowers without proof of income sufficient to repay the loan.
The Credit Card Accountability Responsibility and Disclosure (CARD) Act is the federal law that requires credit card companies to have a guarantor when someone under the age of 21 applies for a credit card, as long as the borrower has proven ability to pay. Cannot provide proof.1
However, a guarantor may be required for many other types of loans besides credit cards, including vehicle financing, personal loans, or private student loans.
Pros and Cons of Guarantors
Pros
- Can help a borrower qualify for a loan
- Could help lower interest rates
Cons
- Liability for debt
- Possible damage to credit score
Pros Explained
- Can help a borrower qualify for a loan: If a guarantor has a healthy credit history and income, it can increase a borrower’s chances of approval when they might not otherwise qualify.
- Can help lower interest rates: Co-signing on a loan or credit card can help the borrower get a lower interest rate, which could save them money over time.
Cons explained
- Liability for the loan: In some cases, the guarantor may be legally liable to repay the full amount of the loan.
- Potential damage to credit score: The guarantor may face damaged credit and collection activities if the primary borrower fails to repay the loan.
