A guarantor is a person who promises to take over someone else's debt, such as installment loans, if they cannot fulfill the obligation themselves. Guarantors make an oath by pledging their assets as collateral against the loan.
In rare instances, individuals act as guarantors by committing their assets against the loan, known as a self-guarantor. The term guarantor is often interchanged with surety.
However, a guarantor is not legally liable for the debt if it is an unsecured loan. If the borrower defaults on their loan, the guarantor has to make good on their end of the bargain or be held legally liable. Keep reading below to learn more about guarantors and why they’re important.
A guarantor, typically an adult aged over eighteen and perhaps a relative, resides in the country where the payment agreement occurs. The agreement may contain collateral or assets that a creditor can seize if the contract is breached. If the borrower often makes payments late, the creditor may charge additional interest or penalty costs from the guarantor.
There are a variety of reasons why a guarantor may be necessary. It ranges from assisting people with poor credit histories to helping those without a high enough income. A guarantor may also not need to be liable for the entire monetary obligation of the guarantee, although this is up to the issuer's and guarantor's discretion.
Below are different situations that require a guarantor and the type of guarantor to use in a specific guarantee:
Certifiers: Aside from pledging their assets as collateral against installment loans, guarantors may also help individuals land jobs, receive passport documents, and get admitted to college. During these situations, guarantors must verify that they know the applicants on a personal level and help them procure the necessary forms.
Limited vs. Unlimited: Under the terms of installment loan agreements, guarantors may be limited or unlimited concerning time and level of financial risk.
Here’s an example: a limited guarantor may be asked to guarantee installment loans only up to a certain point, after which the borrower alone assumes responsibility for the remaining payments and is solely liable for default.
A limited guarantor is liable for the entire installment loan amount during the contract duration but generally not afterward. It differs from a joint guarantee, where a person is obligated for the total amount at all times.
Other Reasons to Get a Guarantor
Guarantors are not a particular type of person for those with poor credit. Landlords commonly require first-time renters to have lease guarantors. Sometimes, college students without established credit need their parents to act as guarantors on their leases.
Guarantors vs. Co-Signers
The difference between a guarantor and a co-signer is that the former has no ownership claim to the asset purchased by the borrower. In contrast, the latter assumes property ownership if the borrower defaults on installment loans.
A co-signer becomes responsible for payments from day one, but a guarantor does not have this obligation until the primary party fails to pay. When this happens, the guarantor has to assume both parties’ responsibilities.
In essence, a co-signer assumes more responsibility from the beginning of an agreement than a guarantor does. A co-signer is equally responsible from the outset; a guarantor is only accountable when the primary party fails to meet their obligations.
Can Guarantors Be a Co-Signer?
Three different names are given to people who take on installment loans that are not theirs. Using the term co-signer is incorrect because they are not responsible for the debt. A guarantor takes on more financial responsibility than a cosigner. They are only liable for the debt if the primary party defaults on their loan.
Can Parents Be a Guarantor?
As a parent, you may act as a guarantor for your child's first rental property or installment loans, as their income is often insufficient at such a young age.
Guarantors are generally not liable for any payment until the borrower defaults. However, you must note that guarantors are financially responsible for the entire sum, should the borrower become unable to make payments. Before engaging in this setup, seek independent financial advice before entering into a guaranteed loan or agreement if anyone is in doubt.
For installment loans in Birmingham, AL, contact Mid-Town Finance Company BHM right now! We offer a variety of personal loan sizes to fit your needs. Upon approval, we will review our options and put clients on an affordable payment plan. We do not make payday or title pawn loans, and there are no hidden fees.