Guarantor
Definition
A guarantor is someone who agrees to be responsible for another's debt or performance under a contract, if the party fails to meet their responsibilities.
Detailed Explanation
A guarantor is essentially promising to ensure that a specific obligation will be fulfilled. If the primary party, such as a borrower or tenant, is unable to meet their obligations, the guarantor steps in to cover the debt or fulfill the performance requirements.
Guarantors are commonly included in loan agreements, lease agreements, and service contracts. In the case of loans, a guarantor may be requested when the borrower has a limited credit history or a low credit score. The guarantor add an additional layer of security, lowering the risk for the lender. Before accepting a guarantor, the lender will thoroughly assess their creditworthiness, to ensure they have the capacity to cover the debt if necessary.
Landlords may require a guarantor for tenants who don’t meet certain income or credit criteria. This is common for students or individuals with unstable employment histories. Here, the guarantor assures the landlord of rent payment continuity even if the tenant fails to pay.
Being a guarantor is a significant responsibility. You are legally bound to fulfill the commitment if the primary party defaults. Therefore, it’s crucial for guarantors to fully understand the extent of their potential obligations before agreeing to sign.
Example
John is a recent college graduate with a modest income and limited credit history. He wants to rent an apartment, but the landlord requires a guarantor due to his financial profile. John’s aunt, Lisa, with a stable income and good credit history, agrees to be his guarantor. She signs the agreement, promising to pay the rent if John is unable to do so.
Key Articles Related To Guarantor
Related Terms
- Cosigner: a person who agrees to be legally responsible for repaying a loan or debt if the primary borrower fails to make payments.
- Surety: A person or entity that assumes responsibility for another's performance of an undertaking, like paying a debt.
- Collateral: an asset or property that a borrower offers to a lender as security for a loan.
FAQs
What is the difference between a guarantor and a cosigner?
A guarantor is responsible for the debt only if the primary borrower defaults, whereas a cosigner is equally responsible for the debt from the start.
Does being a guarantor affect one’s credit score?
Being a guarantor itself does not directly affect your credit score. However, but if the primary party defaults and the guarantor also fails to fulfill the obligation, it can negatively impact their credit score.
Can a guarantor withdraw their responsibility?
Typically, a guarantor cannot withdraw their responsibility until the contract ends or the obligation is fully satisfied.
Are there any risks in being a guarantor?
Yes, the primary risk is financial liability. If the primary party defaults, the guarantor is legally obliged to pay the debt or fulfill the contractual obligations.
Editor: Colin Graves
