What Is a Guarantor?

A guarantor is a person or company that agrees to be responsible for paying a loan that someone else is making. Guarantors share legal responsibility for the debt and your financial information is considered when determining loan approval.

This guide for guarantors will explain why a guarantor may be necessary, what types of guarantors exist, and the pros and cons of having a guarantor on a loan.

Definition and examples of guarantors

Lenders evaluate the financial credentials of a potential borrower. If a borrower cannot qualify for a loan on their own based on credit history, income, age, or other factors, a guarantor may be needed.

A guarantor will apply along with the primary borrower. The lender will also consider the financial credentials of the guarantor. The guarantor will agree to share the legal responsibility for the reimbursement. Because the lender can collect from the guarantor, the loan is less risky for the lender and the loan is more likely to be approved.

In some cases, guarantors are responsible for repayment only if 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 cannot provide proof that they can make minimum payments on the card. The card issuer may require a guarantor, who is responsible for reimbursing the credit card charges.

Guarantors are also used for leases. It is common to see the parents of young tenants co-sign a lease.

How Guarantors Work

Guarantors 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 creditor allows a guarantor, the guarantor provides its financial information and the creditor assesses its ability to pay the debt. A guarantor must have good credit, good income, and many assets; otherwise, you may not be considered a good candidate to guarantee loan repayment.

The guarantee contract must specify the circumstances under which the guarantor will be responsible for paying the debt of the principal borrower.

Types of guarantors

The guarantees are divided into two types:

Conditional guarantees: With a conditional guarantee, certain conditions must be met before the lender attempts to collect money from the guarantor. The guarantee may also be limited to a specific amount or transaction, whether interest or principal, or it may be limited in duration.

Unconditional guarantees: With an unconditional guarantee, the guarantor's liability for the debt is the same as that of the primary borrower.

Do I need a guarantor?

A borrower may require a guarantor if the borrower cannot qualify for a loan on their own. Borrowers with limited credit history or poor credit scores may need a guarantor, as may borrowers without proof of sufficient income to pay the debt.

The Credit Card Accountability and Disclosure Act (CARD) is federal legislation that requires credit card companies to require a guarantor if someone under the age of 21 applies for a credit card, unless the borrower can provide proof of your ability to pay.

However, a guarantor may be needed for many other types of debt in addition to a credit card, including vehicle financing, personal loans, or private student loans.

Pros and Cons of Guarantors

Pros explained

• It can help a borrower qualify for a loan: If a guarantor's credit history and income are healthy, it can increase the borrower's chances of approval when they would not otherwise qualify.
• May Help Lower Interest Rates - Co-signing a loan or credit card can help borrowers earn lower interest rates and save money over time.

Cons explained

• Debt Liability : The guarantor may be legally responsible for paying the full amount of the debt in some cases.
• Possible damage to credit score: The guarantor may face impaired credit and collection activities if the primary borrower defaults on the loan.

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Source: Mortgage Choice

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