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What Is a Guarantor?
If you have rented a house at one time in your life, you are most likely familiar with the term guarantor. This is not the only instance where guarantors are required.
You will also be asked to bring a guarantor when borrowing money from specific lenders. In this article, we explain the whole meaning of a guarantor, why you need one, and their difference with co-signers:
Why Do You Need a Guarantor?
Low income: In the case of renting or leasing, landlords require proof that the party will handle the burden of the annual costs. They will ask that the annual income be certain times the amount of rent, usually three to four times.
If you do not meet the requirements, you will need an insurer to supplement the requirements.
Low Credit Score:
This one mainly applies when applying for a loan. Applicants with a low credit score will find it challenging to secure a loan on their own without an insurer.
A poor credit score is caused by late payments or high credit card balances.
Lack Of Rental History:
Renters with a prior record with other landlords will give the new one confidence in their reliabilities. Therefore they will secure an apartment quite easily.
On the other hand, those without are asked to bring a guarantor in case of property damage or defaulted rent.
What Is The Difference Between a Guarantor And a Co-Signer?
These two are often confused because both commit to cover the costs if the loanee, renter, or lessee defaults to honor the agreements. The only key difference is that a guarantor will only be held liable if the party in agreement fails.
In contrast, a co-signer is immediately responsible in case of a default. Therefore, a co-signers credit score is at risk while the guarantor’s score is not affected.
In the case of an apartment, a co-signer is allowed to live in the same property and risks eviction.
Who Qualifies To Be a Guarantor?
As stated, anyone, including friends and family, can be your guarantors. However, this is only possible if they meet the specified requirements.
Here Is What It Takes To Become One:
Strong credit history:
Because they are pledging to repay someone’s debt in case of default, they require a good credit history to spark confidence that they can raise the necessary amount.
Additionally, a stable income is a requirement when guaranteeing to take someone else’s financial responsibility.
Willingness To Pay The Debt:
Although anyone can become a guarantor, only those with a strong relationship can take responsibility. They should also understand that their assets are at risk if they do not raise money to pay.
What To Consider Before Becoming a Guarantor
If you consider becoming a guarantor to somebody else, you should always seek legal advice to understand the entire responsibility and commitments.
They can be different for loans, rents, and leases. For example, in the case of guarantee in loans, you need to know the total amount, any additional charges, interests. There are also other costs that may affect the total amount paid.
On the other hand, guaranteeing in leases has different repayment strategies and responsibilities. Ensure that you protect your personal assets before entering into an agreement.
Final Word
There are other options apart from guaranteeing to pay for defaulted loans and rents. For example, you can encourage someone to find a better deal or increase assets as an alternative.
Finally, always ensure you have enough capital at all times just in case the party in agreement defaults.
Disclaimer: This article is meant for educational purposes only and is not intended to be construed as financial, tax, legal, or insurance advice.
