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A guarantor is a person or company that guarantees that a loan or other type of debt will be paid. Usually, this person or company agrees to pay another person's debt or perform that person's duty if he or she should fail to do so himself or herself. The term is most commonly used in reference to financial assistance. A parent who cosigns a student loan for a child could be considered a guarantor; if the child defaults on his or her debt, the parent would be held liable for the remainder of the loan.
Why Guarantors are Used
Generally, loan applicants use guarantors if they believe that they will be unable to secure a loan on their own. This might be the case for applicants who have poor credit or no credit history. Individuals and businesses can serve as guarantors or can have guarantors for their loans. In the case of multiple guarantors, each one usually is liable for the entire amount of the debt. Some lending institutions require guarantors to be bonded for a certain amount — usually a percentage of the loan — so that the institution can be confident that the money is recoverable.
The use of a guarantor on a loan application does not ensure that the loan will be approved, because the person who guarantees the loan is considered part of the loan application, so the credit rating of that person or company must be evaluated along with the loan applicant or applicants. If the lending institution believes that the guarantor cannot make good on the debt if the primary applicant defaults on the loan, then the lending institution will not approve the loan. When seeking a guarantor, someone who needs a loan should keep this in mind.
Risks of Being a Guarantor
Before agreeing to serve as a guarantor, a person should assess the primary borrower's credit, income and expenses to determine whether he or she is capable of paying back the loan. The person who guarantees the loan must be prepared to repay the entire amount if necessary and should not agree to guarantee a loan if he or she is financially unable to do so. Anyone who is considering whether to become a guarantor should obtain a copy of the loan contract and should be sure to read and fully understand it before signing it. After signing the contract, there is no way for him or her to back out of the agreement.