A guarantor is a person or business that promises to be responsible for repaying a loan that someone else is taking out. Guarantors share legal liability for the debt, and their financial information is considered when determining loan approval.
This guide to guarantors will explain why a guarantor might be needed, what types of guarantors there are, and the pros and cons of having a guarantor on a loan.
Definition and Examples of Guarantors
Lenders evaluate a potential borrower’s financial credentials. If a borrower cannot qualify for a loan on their own based on their credit history, income, age, or other factors, a guarantor may be required.
A guarantor will apply along with the primary borrower. The lender will consider the guarantor’s financial credentials as well. The guarantor will agree to share legal responsibility for repayment. Because the lender can collect from the guarantor, the loan is less risky for the lender and loan approval is more likely.
In some cases, guarantors are held responsible for repayment only if the lender has tried everything possible to collect payment from the primary borrower.
“Guarantor” and “co-signer” aren’t always interchangeable. In some cases, a co-signer is responsible for covering a late payment immediately, whereas guarantors are tapped to cover a debt only after the lender has exhausted all other ways to get the borrower’s payment.
One example of a guarantor could occur when someone who is under 21 applies for a credit card but is unable to provide proof that they are capable of making minimum payments on the card. The card company may require a guarantor, who becomes liable for repaying any charges on the credit card.
Guarantors are also used for leases. It’s common to see the parents of young renters co-sign a lease.
How Guarantors Work
Guarantors can be used for all different kinds of loans, including credit cards, leases, personal loans, and auto loans. However, not all lenders permit guarantors.
When a lender allows for a guarantor, the guarantor provides their financial information, and the lender assesses their ability to repay the debt. A guarantor should have good credit, 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 off the primary borrower’s debt.
Some types of debt, such as private student loans, offer co-signer release after a certain number of payments are made. This can reduce the risk of guaranteeing a loan.
Types of Guarantors
Guarantees are divided into two types:
- Conditional guarantees: With a conditional guarantee, certain conditions must be met before the creditor tries to collect money from the guarantor. The guarantee might also be limited to a specific amount or transaction, either interest or principal, or it might be limited in time duration.
- Unconditional guarantees: With an unconditional guarantee, the guarantor’s responsibility for the debt is the same as the primary borrower’s.
Do I Need a Guarantor?
A borrower may require a guarantor if the borrower can’t qualify for a loan on their own. Borrowers with a limited credit history or a low credit score may need a guarantor, as could borrowers without proof of sufficient income to repay the debt.
The Credit Card Accountability Responsibility and Disclosure (CARD) Act is federal legislation that mandates credit card companies require a guarantor if someone under the age of 21 is applying for a credit card, unless the borrower can provide proof of ability to pay.
However, a guarantor may be needed for many other kinds of debt besides a credit card, including for vehicle financing, personal loans, or private student loans.
Pros and Cons of Guarantors
- Can help a borrower qualify for a loan
- Could help lower interest rates
- Liability for debt
- Possible damage to credit score
- Can help a borrower qualify for a loan: If a guarantor’s credit history and income are healthy, that can increase the borrower’s chances of approval when they otherwise might not qualify.
- Could help lower interest rates: Co-signing a loan or credit card could help the borrower get lower interest rates, saving them money over time.
- Liability for debt: The guarantor could become legally responsible for repaying the entire amount of the debt in some cases.
- Possible damage to credit score: The guarantor could face damaged credit and collections activities if the primary borrower fails to pay the loan.
- Guarantors guarantee a loan taken out by a primary borrower.
- Guaranteeing a loan means agreeing to repay the amount borrowed if doing so becomes necessary.
- A guarantee can be conditional, which means the guarantor is liable for the debt only under certain circumstances.
- A guarantee can also be unconditional, meaning the guarantor would share equal responsibility for payment with the primary borrower.
- Guarantors can be required for many loan types including credit cards, car loans, personal loans, and student loans.