What Is a Guarantor?

What Is a Guarantor?

By Charles Joseph | Editor, Financial Affairs
Reviewed by Corey Michael | Senior Financial Analyst

A guarantor is a person who agrees to repay the borrower’s debt should they default on agreed repayments. This individual, usually a third party, signs a contract indicating they are legally responsible for paying back the entire loan if the borrower cannot or does not fulfill the terms of the loan. It’s often a requirement in situations where the main applicant is incapable of securing a loan independently. This can be attributed to them having poor credit history, not earning enough income, or being in unstable employment. The guarantor gives extra security to the lender, significantly reducing their risk. If a guarantor steps in, there’s a back-up plan, which makes lending less risky.

Related Questions

1. Who can act as a Guarantor?

Guarantors can be anyone from family and friends, to work colleagues or employers, so long as they aren’t financially connected to the borrower (like a spouse). However, they must typically meet certain requirements, such as having a good credit history and being in stable employment, to prove that they are capable of making the necessary repayments should the need arise.

2. What is the role of a Guarantor in a rental agreement?

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In a rental agreement, a guarantor is responsible for paying the rent if the tenant can’t. This provides security for landlords renting to tenants who may not have stable income or a solid renting history. The guarantor assures the landlord of ongoing rent payments even if the tenant defaults.

3. Can a Guarantor withdraw from a loan agreement?

Once a loan agreement is signed and active, it’s extremely challenging for a guarantor to withdraw their responsibilities. They’re typically bound until the loan is fully paid off. However, there are exceptions in some cases, such as if the loan contract changes without the guarantor’s permission, or the borrower is declared bankrupt.

4. What happens to a Guarantor if the borrower defaults on their loan?

If the borrower defaults, the guarantor is legally obligated to take on the loan repayments. Failing to do so could result in the lender taking legal action against the guarantor, which could involve a court order to pay or seizing of assets (depending on the terms of the agreement).

5. What is the difference between a co-signer and a Guarantor?

Both a co-signer and a guarantor serve as secondary repayment sources in case the borrower defaults. However, a co-signer is usually a co-borrower, too, meaning they share both the responsibility and ownership of the loan. A guarantor does not have any claim to the loan’s assets or property, they merely guarantee the loan payments will be made.