Guarantor Definition

Guarantor Benefits

Having a guarantor benefits those with bad credit or no credit at all. Young people — or people who have bad credit — are often limited in their ability to lease an apartment, take out a loan for a car, or open a credit card. In a business context, a guarantor agrees to pay the primary person’s debt if they fail to pay. A guarantor can help that person get on the right footing by helping to build or rebuild credit. 

Guarantor Considerations

There are some disadvantages to being a guarantor or using one. The guarantor, by definition, will be responsible for a person’s debt if they don’t pay. The guarantor will have to pay the loan, lease, or debt, or be potentially subject to collections or lawsuits. If the primary borrower doesn’t pay, this can also affect the guarantor’s credit score and ability to apply for credit. 

The guarantor’s role doesn’t include any ownership rights to the assets they’re guaranteeing.  For example, if someone acts as the guarantor for their nephew’s lease for his first apartment, they don’t have the right to use the apartment. 

Qualifying as a Guarantor

Not just anyone can qualify as a guarantor. A guarantor’s purpose is to add a more robust financial status to the transaction than what the primary party can offer. If someone has bad credit or no credit history, it is unlikely that a landlord or bank will accept them as a guarantor. After all, the idea is that a guarantor “guarantees” the obligation will be paid, and a person with bad credit is unlikely to be considered for that role. Typically, lenders would like to see that the guarantor has a high credit score and long-term employment.

Other Names for a Guarantor

Another name for a guarantor is a surety. The difference between a guarantor and a surety is relatively minimal; both are ultimately responsible for the primary party’s debt. However, with a surety, the lending party can immediately go after the surety if the primary borrower doesn’t pay. For a guarantor, however, the lending party must first try to collect from the primary borrower before trying to collect from the guarantor.

Many people use the terms guarantor and co-signer interchangeably. However, a guarantor isn’t a co-signer. A co-signer actually co-owns the asset with the primary borrower. A co-signer’s name appears in lease or title documents. However, a guarantor doesn’t have any rights to ownership of whatever they guarantee.

Guarantor Examples

One of the most common guarantor examples occurs within the context of a lease of real property. Suppose someone’s nephew would like to rent his first apartment after graduating from college. He has no credit history and has a new job. Even though he has a letter explaining to the landlord that the job will pay his rent, the landlord would feel more comfortable if he got a guarantor. His aunt or uncle offers to be his guarantor, who signs a separate agreement with the landlord guaranteeing their nephew’s rent. 

If the nephew fails to pay his rent, the landlord will first try to collect the rent from him. If this fails, they will then come after the guarantor to get the money they’re owed.

In this scenario, the guarantor could ask for a limited guarantee, meaning they’d only guarantee the rent for a set period. For example, the aunt or uncle might agree that they’ll guarantee their nephew’s lease for just one year.

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