What Is a Guarantor?
A guarantor is a financial term describing an individual who promises to pay a borrower's debt in the event that the borrower defaults on his or her loan obligation. Guarantors pledge their own assets as collateral against the loans. On rare occasions, individuals act as their own guarantors, by pledging their own assets against the loan. The term "guarantor" is often interchanged with the term "surety."
- A guarantor guarantees to pay a borrower's debt in the event that the borrower defaults on a loan obligation.
- The guarantor guarantees a loan by pledging his or her assets as collateral.
- A guarantor alternatively describes someone who verifies the identity of an individual attempting to land a job or secure a passport.
- Unlike a co-signer, a guarantor has no claim to the asset purchased by the borrower.
Understanding the Role of a Guarantor
A guarantor is typically over the age of 18 and resides in the country where the payment agreement occurs. Guarantors generally exhibit exemplary credit histories and sufficient income to cover the loan payments if and when the borrower defaults, at which time the guarantor's assets may be seized by the lender. And if the borrower chronically makes payments late, the guarantor may be on the hook for additional interest owed or penalty costs.
Guarantors as Certifiers
In addition to pledging their assets as collateral against loans, guarantors may also help individuals land jobs and secure passport documents. In these situations, guarantors certify that they personally know the applicants and corroborate their identities by confirming photo IDs.
Limited Versus Unlimited
As defined under the terms of the loan agreement, a guarantor can either be limited or unlimited, with respect to timetables and levels of financial involvement. Case in point: a limited guarantor may be asked to guarantee a loan only up to a certain time, after which the borrower alone assumes responsibility for the remaining payments and alone suffers the consequences of defaulting. A limited guarantor may also only be responsible for backing a certain percentage of the loan, referred to as a penal sum. This differs from unlimited guarantors, who are liable for the entire amount of the loan throughout the entire duration of the contract.
Other Contexts for Guarantors
Guarantors aren't solely used by borrowers with a poor credit histories. Pointedly: landlords frequently require first-time property renters to provide lease guarantors. This commonly occurs with college students whose parents assume the role of the guarantor, in case the tenant is unable to make the rent or prematurely breaks the lease agreement.
Guarantors Versus Co-Signers
A guarantor differs from a co-signer, who co-owns the asset, and whose name appears on titles. Co-signer arrangements typically occur when the borrower’s qualifying income is less than the figure stipulated in the lender's requirement. This differs from guarantors, who step in only when borrowers have sufficient income, but are thwarted by lousy credit histories. Co-signers share ownership of an asset, while guarantors have no claim to the asset purchased by the borrower.
However, in the event the borrower has a claim against a 3rd party that has caused the default, the guarantor has the right to invoke a process called "subrogation" ("step into the shoes of the borrower") in order to recover damages.
In the event of a default, the guarantor’s credit history may be adversely affected, which may limit his or her own chances of securing loans in the future.