What is a Guarantor?
Guarantor refers to an individual who commits to pay a debt borrowed by the borrower if the latter defaults on the set loan obligations. In most cases, the borrower is well-known to the guarantor. The guarantor may pledge their assets or existing bank balances as collateral against the loan facility.
Guarantors are legally recognized as being answerable for a loan. They may also secure rental privileges for another individual by assuming the obligations set in the lease agreement, usually on the timely payment of rent. When one embraces the role of a guarantor, they essentially agree to forfeit the collateral in case the guaranteed defaults on the agreed-upon payment.
Here's an article about what a guarantor is.
What Does Being a Guarantor Mean?
In essence, being a guarantor means helping another party or individual access credit, such as a loan or even a mortgage. The lender bases their decision to accept the borrower's request for a loan, based on the guarantor's promise to pay. The burden of repaying the underlying debt automatically shifts to the guarantor if the borrower breaks the promise to repay.
The lender has express rights to repossess the collateral in case of a breach of the repayment agreement. Therefore, a borrower needs to understand what a guarantor is and the probable implications if they fail to honor their agreement.
Here's an article on what it means to be a guarantor.
Who is Considered Guarantor?
People will often ask the common question, “Who qualifies to be a guarantor?” Well, almost anyone can be a guarantor in case of a loan facility. The guarantor can be a partner, friend, or family member. The only regulation is concerning age.
Most states generally consider the age of 21 as an acceptable minimum age for a guarantor. Further, the guarantor must also reside within the same condition as the borrower in some states. These rules change from state to state and often exist to caution the lender against losses.
Beyond the age and residency factor, a lender will also consider another important issue: creditworthiness. While many may qualify to be a guarantor, only individuals with a positive credit history make the final cut. Financial stability is always an essential consideration before one can become a guarantor.
The lender needs to be sure that the guarantor understands the risks of this role. Beyond this, the guarantor needs to prove that they have the financial capacity to meet the financial obligation in case the borrower defaults.
Here's an article on who can be a guarantor.
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Types of Guarantors
There are many varying scenarios where a guarantor may be needed. This is why it's essential to understand the different types of guarantors.
Guarantor for Loan
The guarantor for a loan is the most well-known type of guarantor. This refers to an unsecured loan where the designated guarantor has to act as an underwriter for a financial loan facility extended to another person. This type of guarantor assures the lender that the loan will eventually be recovered if the borrower fails to honor the agreement to pay.
The type of guarantor is shared between individuals, banks, and mortgage lenders. If a loan guarantor fails to meet the financial obligation, some or all of their assets listed as collateral may recover the losses.
Guarantor for Medical
The other common type of guarantor is the guarantor for medical. This type of guarantor is responsible for any bills accrued by a patient after receiving medical care.
Most times, the medical guarantor takes responsibility for the medical costs if other alternatives such as Medicaid and personal health insurance fail. As a medical guarantor, the individual or entity has the financial responsibility for the patient's account payment.
The guarantor should understand that all the expenses from the treatment and recovery process are their responsibility. For example, a patient may be asked for a medical guarantor if the medical provider suspects that they may not meet the cost of ongoing treatment.
Such circumstances for a medical guarantor may include a scenario where the patient doesn't have a job or recently started their first job. Other reasons that may warrant the need for a medical guarantor include the lack of credit history or a situation where the patient has a poor credit history.
A guarantor should seek to understand the extent of the financial burden that will potentially accrue before committing. Almost anyone with a proven credit record can act as a guarantor. A parent, sibling, spouse, friend, and colleague are all suitable options to become medical guarantors.
Guarantor for Lease
Every first-time renter knows only too well the many requirements they need to fulfill before getting into a lease agreement. The ability to meet the credit score threshold is among the main hurdles renters face. And this is what defines the guarantor for a mortgage.
The guarantor for a lease is a person who agrees to enter a lease agreement with a tenant by promising to pay rent on their behalf. The guarantor may be a parent, relative, or close friend.
All the guarantor needs are to prove that they have the financial capacity to handle any accruing arrears if the tenant falls behind in the payment process.
Most cities, including New York, have strict renting an apartment. If you have little to no rental history, providing a guarantor may be a requirement.
The guarantor must provide pay stubs, tax returns, bank statements, and social security numbers. This helps to support their capacity to provide collateral if the tenant defaults on their payment.
Guarantor for Insurance
The guarantor for insurance often provides general security. If an individual cannot meet certain financial obligations, the insurance guarantor can assist by fulfilling their underlying contractual agreement. This helps the borrower to meet the burden on time.
The guarantor, in this case, helps the borrower meet all the underlying debts until they can pay back to the guarantor what they owe.
Guarantor for Service
While most guarantors are relatives, close friends, and acquittances, one may also consider guarantors for service. These entities hold a borrower's hand by offsetting any existing financial obligation.
The borrower then commits to pay the guarantor a fee for their service. In such cases, the lender may require a subordination agreement to affirm the willingness to clear any underlying debt.
Here's an article about the different types of guarantors.
What Does Applying with a Guarantor Mean?
Applying with a guarantor means having a third party who agrees to settle all your underlying financial obligations if you cannot meet your part of the bargain. The process is legally binding and requires a well-drafted guarantor agreement. The contract must clearly show the guarantor's official willingness to be part of the agreement.
Guarantor vs. Cosigner
The main difference between cosigner and guarantor is that the former is another tenant. The cosigner may be a relative spouse or friend. They may decide to share the rent accruing, fees, and potential damages.
Unlike the guarantor, the cosigner may opt to leave in the rented unit and therefore take up an equal share of the bills accruing. Depending on specific circumstances, a landlord may require the rent agreement to include a cosigner to prove that the tenant can afford the accruing rent.
Having Legal Representation is a Wise Decision
In any guarantor agreement, it's essential to have a legal mind by your side. Ideally, attorneys understand the complexities of guarantor agreements and all the clauses that legitimize a contract.
Before engaging in the drafting and signing of any agreement, don't hesitate to contact us for unmatched legal support. Post a project in ContractsCounsel’s marketplace to get flat fee bids from lawyers for your project.
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