Personal Loans: What Is a Guarantor?

Anelle Valdes
Anelle Valdes

When you apply for a service, lease or loan, the company, landlord or lender wants to be as sure as they can that you’ll make the appropriate payments. Often, they’ll use your credit history and income as a way to gauge that likelihood. A strong credit history indicates you’re someone who has paid on time in the past, and you may need to demonstrate that you have the income to cover the payments consistently.

If you’re lacking in either of those areas, you might need a guarantor to get approved. What is a guarantor? Find out more below.

What Is a Guarantor on a Loan?

A guarantor loan occurs when someone agrees to sign as a guarantor. That means the person agrees to be on the hook for payments if the loan applicant doesn’t hold up their end of the deal.

In many cases, the guarantor also agrees that some of their assets can be used as collateral for the loan. That means that if neither the borrower nor the guarantor pays the loan as agreed, the lender can take possession of the assets and sell them to get the money it’s owed.

For example, if someone takes out an installment loan for $5,000, a guarantor might put up a boat as collateral. If the person becomes delinquent on the loan, the lender might attempt to collect from the guarantor. If no payments are made after a certain period of time, the loan might be considered in default. At that point, the creditor might come after the boat.

Is a Guarantor the Same as a Cosigner?

A guarantor sounds a lot like a cosigner, but it’s not the same thing. Cosigners typically occur when you’re dealing with secured loans, such as a vehicle loan.

If someone doesn’t have the credit history or income for a bank to approve a loan, they could ask a family member or friend to cosign for them. When this happens, the cosigner has an equal right to the asset. For example, if someone cosigns for a car loan for you and you don’t make the payments, the bank might come after them for the money. In that situation, they might have a legal right to ownership of the car.

With guarantor loans, you’re not typically purchasing an asset by using the loan. Instead, you’re getting the funds outright and the guarantor is using an asset he or she already owns as surety. But if you use the loan funds to buy something, the guarantor doesn’t have any ownership rights in what you purchased.

Who Can Be a Guarantor?

Each lender sets the requirements for what type of guarantor it will accept on a loan. Chances are you’re seeking a guarantor for a loan because you couldn’t get one on your own. Or, perhaps you couldn’t get a loan for enough money or at rates you could deal with. No matter what the case is, the guarantor will at least need better credit than you have.

While requirements might differ slightly by lender (and by state), typically, a guarantor:

  • Must be a legal adult able to sign contracts on behalf of themselves
    • After all, that’s exactly what they’ll be doing when they become a guarantor — signing a contract with the lender.
  • Should have a good credit score and history
    • What’s a good credit score? Typically, anything around 680 and up is considered good, but depending on the lender and situation, your guarantor might not need a score that high.
  • Must meet any other requirements set by the lender
    • These can include minimum income requirements as well as the ability to offer an asset for surety.

Uses of Guarantee Agreements

Guarantee agreements are actually used in a wide range of cases and not just for personal installment loans. A common example of a guarantee agreement is seen with first-time renters who have little-to-no credit history, such as college students. A parent or other person with a strong credit history or income may need to sign a guarantee that they will cover rent and other fees if the leaseholder is unable to do so (or simply doesn’t).

Speaking of college students, student loans also often involve guarantors. A parent may guarantee a student loan, even if the student takes the loan out him or herself. This is more likely with private student loans than government loans.

In relatively rare cases, individuals can be the guarantor of their own loans. This actually happens most often with certain types of personal installment loans. If the creditor sees your credit history and income as marginal, it might think you’re too risky for a completely unsecured loan.

Instead, the lender might offer you a loan if you agree to put up collateral. For example, you might agree to hand over a diamond ring passed down from your grandmother or your television and home audio system if you fail to make payments on the loan. These items are the surety on the loan.

Obligations of the Guarantor

The obligation of the guarantor is to pay the loan if the borrower doesn’t. If you’re considering becoming a guarantor for a loan, it’s important to stay in contact with the borrower. It helps to know if they are unable to make payments as soon as possible. Otherwise, the loan might enter default before you realize what is going on. At that point, the lender might move to seize your assets if you can’t cover the arrears (e.g. the past-due payments, fees and interest owed on the loan at that point).

If you’re trying to get a loan and believe you might need a guarantor, it’s a good idea to ask someone you know and trust. Mostly, you want to ensure that they actually do have the credit score and income to support your loan. Otherwise, you could be applying just to get another denial — and every time you apply for a loan, your credit report is hit with a hard inquiry. Each of those inquiries can bring your score down a bit. Too many hard inquiries in a short period of time can actually make it even more difficult for you to get approved for a loan.

Getting a Poor Credit Loan without a Separate Guarantor

The downside of a guarantor loan — whether you’re the guarantor or someone else steps in — is that you put someone’s assets at risk if you can’t pay the loan. And while you should always make every effort to make on-time payments, you may not want to put grandma’s diamond ring or your friend’s boat on the line if something like a job loss comes up.

You may have other options for getting a loan, even if you have lackluster credit. Wise Loan offers poor credit installment loans online. You can apply in minutes, and if you’re approved, you can get the money same-day or next day in most cases. Wise Loan is a responsible lender working with people who need fast cash loans and want to rebuild their credit by making on-time installment payments.

See if you qualify for a personal installment loan without a guarantor by completing Wise Loan’s easy online application.

The recommendations contained in this article are designed for informational purposes only.  Essential Lending DBA Wise Loan does not guarantee the accuracy of the information provided in this article; is not responsible for any errors, omissions, or misrepresentations; and is not responsible for the consequences of any decisions or actions taken as a result of the information provided above.

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