A guarantor is a person who signs on to a loan or lease with the promise of paying off the borrower or lessee’s debt if the borrower or lessee defaults on their payments. A guarantor uses their own assets as collateral against the loan or rent payments.
To be a guarantor, one must be over 18 and reside in the country where the agreement occurs. Almost always, a guarantor is required to have very good credit, with enough income to cover loan payments if a borrower defaults.
Depending on the state, the required income varies. In New York, for instance, if you were to become a guarantor for someone renting an apartment, your yearly income would have to be 80 times the rent.
In the case of loan payments, if both the borrower and guarantor default on payments, then the guarantor is at risk of having their assets seized by the lender. If the borrower is always making late payments, then the guarantor could be on the hook or have to pay a penalty.
A guarantor’s credit history is also at risk if there are any default payments.
Why Use a Guarantor
Guarantors could be used for a number of reasons. Maybe your credit is too low to apply for a loan, or maybe your income isn’t high enough for the apartment you want to rent. In those instances, a guarantor might be necessary.
With a guarantor, you would have the ability to secure a higher loan or rent a higher-priced apartment.
Sometimes, landlords also require first-time renters to have a guarantor in case the tenant breaks the lease or is unable to pay the rent. This situation is most common when college students are renting apartments and use their parents as guarantors.
Types of Guarantors
Sometimes, people need a guarantor to secure a job or a passport. In that case, a guarantor would certify that they know the applicant and that the applicant is who they say they are.
For a loan, a limited guarantor would guarantee the loan for a set period of time. After that set period, the borrower is the only one responsible for the loan payments and wouldn’t have someone to fall back on if they default.
Another type of limited guarantor might be one in which the guarantor is only responsible for backing a certain percentage of payments. That percentage is called the “penal sum.”
An unlimited guarantor is responsible for backing all of the payments in full throughout the entire time period of the contract.
What Is the Difference Between a Guarantor and a Co-Signer?
The main difference between a guarantor and a co-signer is that a co-signer co-owns the asset and their name appears on the title. If two people are renting a retail space together, for instance, then they are co-signers. Or if two people are taking out a loan together, they are co-signers. The apartment or loan belongs to both of them, resulting in unlimited liability or joint liability for both parties.
A guarantor, however, exists for the purpose of making payments if the signer or co-signer defaults. They do not own or rent the place, but rather, they provide assurance to the lender or landlord that in the situation of default, there is someone else who can make the payments.
Co-signers on an apartment are both responsible for paying the rent every month, whereas a guarantor on an apartment is only responsible for paying the rent if the co-signers do not pay. The same goes for a loan payment.