Guarantor, as a legal term, refers to a person or entity legally responsible for another’s debt or obligations. All parties involved – the guarantor, the creditor, and the principal borrower – should agree upon the details of the guarantor’s obligations.
The concept of a guarantor is relatively simple. It is a form of security for lenders, allowing them to pursue collectors for a debt in the event of a default or refusal of payment. In exchange for the guarantee, the guarantor may receive some form of financial consideration, such as a lower interest rate.
Types of Guarantor
Most commonly, a guarantor is somebody like a relative or close friend who promises to repay a loan or debt in the event of a default. In the financial world, guarantors are usually legal entities, such as banks or insurance companies. Other types of guarantors can include the government or a credit union.
The Benefits of Having a Guarantor
Having a guarantor is beneficial for both the borrower and the lender as it reduces the risk of default. For the borrower, having someone to vouch for them provides some assurance that their debt will be paid in the event of a default. The lender, meanwhile, when part of a contract, has the guarantee that they will get their money back in the event that the borrower is unable to pay.
Having a guarantor also provides an additional layer of security for the creditor. While the borrower remains solely responsible for the debt, the creditor knows that the guarantor is obligated to pay the debt if the borrower is unable or unwilling to do so.
Wrapping Up: What to Consider When Signing as a Guarantor
When signing on as a guarantor, it’s important to understand the legal responsibilities and obligations you are agreeing to. Be sure to read the fine print and consult a lawyer if necessary. As a guarantor, you are taking on the responsibility of the debt if the borrower defaults on the loan. Therefore, it’s important to only take on a guarantee for someone you trust and if you understand the financial risks to yourself.