Guarantor

From bad credit history and limited available funds to inconsistent income, there are many reasons why lenders require borrowers to prove their ability to repay the loan. Getting a guarantor — an individual who agrees to take on responsibility for debt or other financial obligations if the borrower is unable to do so — is one of the most common ways to secure financing for a loan. In this brief explainer, we’ll take a closer look at the main types of guarantors, the pros and cons of being one, and why guarantors and co-signers are two terms that should not be used interchangeably.

Main Types of Guarantors

Although providing a guarantor is aimed at proving the borrower’s ability to repay debt or other financial obligations, not all guarantors are created equal. Here’s a brief look at the most common types of guarantors you’re likely to encounter when taking a loan.

A limited guarantor comes with constraints: the guarantor can provide a guarantee for only part of the loan; afterward, the borrower is alone responsible for the repayments and any possible ramifications.
An unlimited guarantor takes responsibility for the borrower’s debt or loan for the entire duration of the contract.
Certifying guarantors vouch for the borrower’s character or identity. This type of guarantor may help individuals secure documents or land a job.
A rental agreement guarantor is commonly used by first-time property renters. For instance, parents can become guarantors for their child’s lease agreement.

Why Take a Guarantor

There are many potential scenarios where lenders may require borrowers to provide a guarantee of their ability to repay, such as:

Poor credit score;
Low or inconsistent income;
No rental history.

Becoming a Guarantor: Pros and Cons

Although taking a guarantor comes with innumerable advantages, becoming a guarantor is an entirely different deal that offers high risks and low benefits. Let’s take a look at why taking a guarantor may be a good idea and why becoming one may be a process riddled with problems.

Pros

Better Loan Terms. When borrowers are backed by the guarantors, they can expect to get better loan terms, like lower interest rates or borrowing higher amounts.
Improved Credit History. Timely transactions backed by the guarantor are a great way to improve the credit history.

Cons

Negative Impact on the Credit History. The guarantor’s credit score may be affected, as becoming one will be included in their credit score.
Outstanding Loan Balance Liability. If the borrower fails to repay the loan, the guarantor must fulfill the financial obligation.

Guarantor vs. Co-Signer: Main Differences

Although both terms are often used interchangeably, several significant differences set them apart. Guarantors take responsibility for the loan, but they don’t own the asset and don’t get access to funds. It’s a high-risk, no-benefit situation. On the other hand, the co-signer is responsible for the loan, makes timely repayments, and co-owns the assets or funds.

From low credit scores and no rental history to low annual income and job instability, there are many scenarios where lenders may require a guarantor. By taking a guarantor, a borrower will increase the chances of loan approval, qualify for better loan terms and interest rates, and improve the overall score history.