Guarantor

Updated on April 12, 2024
Article byGayatri Ailani
Edited byGayatri Ailani
Reviewed byDheeraj Vaidya, CFA, FRM

Guarantor Meaning

A guarantor is an entity that agrees to guarantee the debt repayment if the borrower defaults. The loan guarantor presents their assets as collateral against the loan, which is a protection element that motivates the lender to approve the loan application. 

Guarantor

They are usually present in scenarios or deals involving the creditor and debtor. If the first party or the primary borrower, the debtor, meets the obligations made to the second party, the creditor, the guarantor is in a safe position. However, in the event of a default, the guarantor is responsible for paying or settling the liabilities of the first party to the second party.

Key Takeaways

  • A guarantor is an individual or business that ensures debt repayment to the lender when the borrower defaults. 
  • It is the entity that offers or acts as a guarantee. The entity presents its property as security for the loans, and they are liable to step in and make the repayment if the borrower fails to repay the loan. 
  • A guarantor form confirms the guaranteeing entity’s decision to assume responsibility if an individual fails to uphold the terms of an agreement. For example, the guaranteeing entity agrees to accept responsibility if someone violates the terms of an agreement or fails to pay the payment.

How does a Guarantor Work?

A guarantee is a significant element when an agreement is made between two parties. It can be an individual or a business, and their inclusion is important to enter into the agreement. For example, when the lender has less confidence in the borrower due to a low credit score, the presence of a guarantee can attract the lender. Furthermore, a guarantor needs strong credit, a good income, and adequate assets to guarantee loan repayment. 

They are important for different kinds of loans and in many areas. For example, a mortgage guarantor promises to make mortgage repayments if the mortgage borrower defaults on their obligation. A passport guarantor is an individual who stands a guarantee for passport application. Finally, a lease guarantor is someone who will sign a lease for an apartment building with a renter, promising to pay the rent if the renter cannot do so.

They can be associated with a conditional or unconditional guarantee. In the case of a conditional guarantee, certain conditions must be completed before the creditor can attempt to collect money from the guaranteeing entity. The guarantee may also be restricted to a certain transaction or amount. In the case of an unconditional guarantee, the principal borrower and the guarantor are equally liable for the debt.

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Sample of the Guarantor Form

Guarantor Form

A guarantor form affirms the decision of the guarantor to take on responsibility if the borrower fails to uphold the terms of an agreement. By signing the form, the guaranteeing entity commits to accept responsibility if the borrower violates the conditions of an agreement or does not pay the payment. The form includes guarantors:

  • Name: The real name must be written down on the form: first name, last name, and middle name.
  • Contact details: The form should have their home and workplace addresses, contact information, and signature fields. If the principal doesn’t follow the conditions of the agreement, they will be contacted using the contact information.
  • Job details: It is also important to know whether the guarantor is employed or unemployed. Similar to self-employment, additional questions regarding the profession are asked if someone is employed. It is especially important when the guarantor is acting as a substitute for the debtor.
  • Principal’s name: The form includes the principal’s name. It should be made very explicit so that whosoever is accountable should be known to the creditor if someone violates the conditions of the agreement.
  • Relationship with the principal: The relationship with the principal is also important. A parent, sibling, spouse, etc., could be the guarantor.
  • Signature and date: The signature testifies to the accuracy of all the information provided and confirms that they are willing to act as a guarantor. It also specifies the date of the agreement.

Example

Let us look at an example to understand the concept better:

Mike, who has recently started working for XYZ ltd, needed a mortgage to buy a house. So he got a $300,000 mortgage loan from a bank to buy the house. Even though Mike’s income was adequate to make the repayments, he had to present a guarantor since he has a poor credit history. So Mr.Marx, Mike’s Uncle with a strong credit score, joined as a guaranteeing entity. If Mike fails to repay the loan, Mr. Marx will become liable for making the repayment.

Guarantor vs. Cosigner vs. Co-borrower

  • A guarantor is someone who decides to accept financial responsibility if the borrower defaults. 
  • Cosigner signs all documents related to the deal along with the borrower. Generally, the cosigner has no rights or ownership stake but obligations. However, a cosigner can be a relative, close friend, or partner ready to accept the liability in specific situations.
  • Co-borrower shares the debt or ownership and responsibility of loan repayment. Usually, a spouse or a parent becomes the co-borrower. 

Frequently Asked Questions (FAQs)

Who can be a guarantor?

In the United States, the guarantor must have a good credit score and be a citizen or permanent resident. In addition, a guaranteeing entity can be a friend, a spouse, a close relative, or a coworker.

What is a guarantor for rent?

A “guarantor” may be required for someone to rent housing. A guaranteeing entity is someone who promises to pay the rent if the renter doesn’t. The landlord may request the guaranteeing entity to pay the rent if the renter fails to do so on time. The landlord can sue the guaranteeing entity to obtain the remaining sum if they don’t make the payments.

What is a no-guarantor loan?

It indicates the loan is offered in the absence of a guarantor. The interest rate for loans without a guaranteeing entity is often high. This is because the lender levies a higher interest rate, believing there is a significant probability of loan default.

This article has been a Guide to Guarantor and its Meaning. We explain its examples, sample form, and comparison with th cosigner & co-borrower. You can also go through our recommended articles on corporate finance –

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