You’ve been on the search for the perfect apartment or house for months. Finally, you find the right one, but it’s just out of your price range. What to do? If only there were a way you could come up with a bit more cash every month or borrow it from someone.
Or maybe there is another way. What if someone could back you up if you couldn’t make the payments or make up the difference for you where you fall short? Well, lucky for you, there is that exact person out there.
They are called guarantors, and they can help you pay your rent for that perfect apartment, get a lower interest rate on a loan, or help with other monetary shortfalls. So what is a guarantor exactly, what do they do, and how can you find one? So let’s go through all that now.
What is a Guarantor?
So what is a guarantor? A guarantor helps someone else get credit. The credit can come in a loan, mortgage, or providing rent if someone cannot pay. Essentially, a guarantor is “guaranteeing” someone else’s debt will get paid if they cannot do so themselves. They will make a personal guarantee or pledge to pay the debt if the borrower defaults.
Typically, a guarantor is someone that knows you and trusts you’ll do everything you can to pay any debt yourself. Parents are the most common guarantors, as are other relatives or family-member, and close friends.
Who Can Be A Guarantor?
As mentioned above, guarantors are parents, relatives, or friends of whoever needs help to repay their loan\debts most of the time. When looking for a guarantor, there are no specific requirements the person signing on as the guarantor needs to qualify. However, the person must give the lender, whether a mortgage lender or landlord, confidence that they will pay-back the debt owed if the loan recipient can’t pay.
Almost anyone can be a guarantor, even your spouse if needed (if you have a separate bank-account, that is). As the guarantor, though, you should completely trust the person you are backing up as if they don’t pay their debt, it will fall on your shoulders. If the person seeking help tends not to be trustworthy, you might want to rethink being their guarantor.
The requirements to instill confidence can differ from person to person or company to company. Typically speaking, it’s advantageous for guarantors to be twenty-one years of age or older. Their income should also be significantly higher than the monthly payments that need to be made. A guarantor should also have a good credit history\good credit score and be financially stable.
Having a guarantor in the same state can also be an advantage (many landlords prefer it) but not a requirement. A guarantor does not need to live in the same state or even the same country, but many times it’s preferred that they do.
You also are not limited to one guarantor. When necessary, there can be multiple guarantors on a loan.
Why Would a Guarantor Be Needed?
Besides asking, “What is a Guarantor?” you might wonder why a guarantor is needed. The main reason is to act as a backup for a loan or help some with low credit. Below are many of the scenarios as to why someone might need a guarantor:
- Little or no credit history
- Bad credit\poor credit score
- Just started a new job
- Salary is too low to pay rent or loan
- Being a first time renter
These are just a few examples, but a guarantor might be required anytime a lender needs extra assurance that a borrower will pay their debt. Mortgage loans, a car-loan, apartment lease (rent) are just some of the more common scenarios a guarantor can help secure the loan.
When Should I Look For A Guarantor?
If you think you might be in need of a guarantor, it’s best to have one lined up as early as possible. If you have some ready to act as a guarantor before starting any loan application process, getting a lease agreement, or applying for a mortgage loan, you’ll be in better shape.
Already having someone agreeing to be a guarantor up front will streamline the process and give any potential loan lenders an easier time getting your rental application, mortgage application or any other paperwork through faster.
How Long Is a Guarantor Liable?
Depending on the type of guarantor, more on that later, guarantors are responsible for backing up a loan for different amounts of time. In many cases, a guarantor can be taken off a loan as long as the borrower is in good standing.
Technically speaking, they are not taken off the loan, though. Instead, the borrower would have to refinance or sign a new tenancy agreement, this time without the guarantor signing on as well.
As a guarantor, being taken off a loan can be advantageous. When you are a guarantor, although the debt is the borrower’s responsibility, it is seen as your debt in the eyes of lenders as well. Having this extra debt can hurt your ability to get a loan or the best terms possible since you’ll already have debt to your name.
Advantages to Having a Guarantor
When it comes to guarantors, all the benefits are for the borrower, and the cons are for the guarantor.
For the borrower, having a Guarantor can have several benefits. Loans are most likely to be approved and could be done so faster than without a guarantor. Loans for higher amounts and low interest rates could also be more likely with a guarantor.
As mentioned earlier, the guarantor takes on all the risks. For example, if the borrower does not pay, it’s on the guarantor to put out their money to pay off the debt. These risks are why the guarantor is typically someone that would help the borrower out, like a parent, anyway.
Limited vs. Unlimited Guarantor
There are different types of guarantors as well. Previously mentioned was that if a borrower is in good standing on a loan, they can refinance without the guarantor to get them off the hook. Still, there are more ways a guarantor can be relieved of their obligations as well.
Being a limited guarantor is the other way you can eventually not need to back up a loan for a borrower. For example, a limited guarantor might only be liable for a specific time frame or no longer be required once a certain percentage of the loan amount is repaid.
Suppose you sign on to be an unlimited guarantor. In that case, you’ll be responsible for backing up the borrower for the entire duration of the loan or lease, no matter how much has been paid-off.
Guarantor vs. Co-Signers
When answering the question, what is a guarantor, it can sometimes be confused with a co-signer. Although similar in nature, there are a few key differences between being a guarantor and when you co-sign with someone.
The most significant difference is that while a guarantor has no ownership of an asset if they end up paying part of the loan, a co-signer does. When you are a co-signing, you are taking on more financial responsibility as you help pay for the loan right away, but you also own part of the asset. So while a guarantor might never need to put out any money, as they are only liable if the primary borrower fails to pay, if they do, they walk away with nothing to show for it. A cosigner though will at least have partial ownership for their troubles.
Other Sources of Guarantors
Many people don’t have anyone in their lives that could be a viable option as a guarantor. Either no one they know makes enough money, don’t have high enough creditworthiness, or wouldn’t back up their loan for other reasons. When this is the case, there are third-party services you can use that will provide a guarantor for you, at a cost, of course.
Using a third party is more likely for a lease\rent need than a loan. Typically, the potential tenant will pay the guarantor service anywhere from 4% to 10% of the annual rent. For example, suppose your rent is $2,000 a month for a 12-month lease with a 6% rate. In that case, you’ll be responsible for one payment of $1,440 (typically upfront before the lease signing).
What Happens If a Guarantor Cannot Pay?
If a guarantor cannot pay and the loan is defaulted on, both the guarantor and borrower are held responsible for the loan\debtand will have legal action taken against them. Therefore, the lender will proceed with the collection proceedings against the guarantor and the tenant. These proceedings will show up on a credit report for both pirates and could harm the credit score of both parties as well.
What Is A Guarantor – Final Thoughts
A guarantor can be a valuable way to get a loan or lease that would otherwise be out of reach for you. Using a guarantor comes with no downside for the potential borrower, but becoming a guarantor can come with many risks. For example, suppose you are looking to be a guarantor. In that case, it’s essential that you completely trust the borrower, as you now have a repayment obligation if they cannot pay. Although there are ways to be relieved of your responsibilities eventually, there can still be a lot of money spent before you get there. If you do need to put out your own money, you’ll still come away with nothing in the end.
Jeff is a fan of all things finance. When he’s not out there changing the world with his blog, you can find him on a run, a Mets game, playing video games, or just playing around with his kids.