Learn more about what a guarantor is in business.
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The definition of a guarantor is a person who guarantees something for someone else. In the financial world, the guarantor definition is a person or entity who promises to pay for something on another person’s behalf if that person doesn’t.
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. The guarantor business definition means that someone 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.
There are some guarantor disadvantages. 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 definition doesn’t include any ownership rights to the assets they’re guaranteeing. For example, if you’re the guarantor for your nephew’s lease for his first apartment, you don’t have the right to use the apartment.
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 you have bad credit or no credit history, it is unlikely that a landlord or bank will accept you as a guarantor. After all, the idea is that a guarantor “guarantees” the obligation will be paid, and a person with bad credit will likely not be considered for that role. Typically, lenders would like to see that you have a high credit score and long-term employment.
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.
One of the most common guarantor examples is within the context of a lease of real property. Let’s say your 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. You offer to be his guarantor. You’ll sign a separate agreement with the landlord guaranteeing your nephew’s rent.
If your 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 you.
You can ask the landlord for a limited guarantee. This means that you will guarantee the rent only for a set period. In this example, you could tell the landlord that you will guarantee your nephew’s lease for only one year.
Understanding the definition of a guarantor may be confusing. That’s why we’re here to help. We can help you form and run a new business with our Business Formation services. Plus, if you would like to understand whether your business needs a guarantor, we offer a free accounting consultation with this service.
Disclaimer: The content on this page is for informational purposes only, and does not constitute legal, tax, or accounting advice. If you have specific questions about any of these topics, seek the counsel of a licensed professional.