# What Is a Guarantor? Definition, Roles, and Financial Responsibilities

![Guarantor](https://www.investopedia.com/thmb/W2AqHx0AC7e_k0hJ9V1UnavXWPc=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/guarantor.asp-final-1100b33d9ac9434ca739a9ae6c5bb1e8.png)

*— Zoe Hansen / Investopedia*

> **Definition**
>
> A guarantor is an individual or entity who promises to pay a debt if the main party defaults. They act as a backup source of payment if the borrower can’t cover the debt.

## What Is a Guarantor?

“Guarantor” is an individual who promises to pay a borrower’s debt if the borrower defaults on their loan obligation. Guarantors [pledge their own assets](https://www.investopedia.com/terms/p/pledgedasset.asp) as collateral against the loans but have no claim to the borrower's assets. The typical qualifications for being a guarantor include having a strong credit history and sufficient income. Guarantors are frequently used in rental agreements and loans for individuals with limited credit history.

They are different from a co-signer, who co-owns the asset and has their name appear on the title, if one is available. Co-signers are used when the borrower's income is less than the lender's requirement.

People often use the term "guarantor" interchangeably with "surety."

### Key Takeaways

*   A guarantor provides assurance for a loan by pledging their own assets as collateral, becoming liable if the borrower fails to meet their payment obligations.
*   Unlike co-signers, guarantors are only responsible for the debt if the borrower defaults, and they do not have ownership rights over the purchased asset.
*   While having a guarantor can accelerate loan approval and improve borrowing conditions for the borrower, it poses risks for the guarantor, including potential legal action and a negative impact on their credit score if they fail to cover the debt.
*   Guarantors may also serve in roles beyond financial guarantees, such as certifying identities for passport or job applications, indicating their versatile significance in various types of agreements.  
    

## How Guarantors Function in Financial Agreements

A guarantor is typically over the age of 18 and [resides in the country](https://www.investopedia.com/terms/p/principalresidence.asp) where the payment agreement occurs. Guarantors generally exhibit exemplary [credit histories](https://www.investopedia.com/terms/c/credit-history.asp) and sufficient [income](https://www.investopedia.com/terms/i/income.asp) to cover the loan payments if and when the borrower [defaults](https://www.investopedia.com/terms/d/default2.asp), at which time the guarantor’s [assets](https://www.investopedia.com/terms/a/asset.asp) may be seized by the lender. And if the borrower chronically makes payments late, the guarantor may be on the hook for additional [interest](https://www.investopedia.com/terms/i/interest.asp) owed or penalty costs.

## Various Roles of Guarantors in Different Scenarios

There are many different scenarios in which a guarantor would need to be used. This ranges from assisting people with poor credit histories to simply assisting those without a high enough income. Guarantors also don’t necessarily need to be liable for the entire monetary obligation in the guarantee. Below are different situations that would require a guarantor, as well as the type of guarantor in a specific guarantee.

### Guarantors As Certifiers

Guarantors can also help individuals get jobs and secure passports by verifying their identity. In these situations, guarantors certify that they personally know the applicants and corroborate their identities by confirming photo IDs.

### Limited vs. Unlimited

As defined under the terms of the loan agreement, a guarantor can either be limited or unlimited concerning timetables and levels of financial involvement. Case in point: A limited guarantor may be asked to guarantee a [loan](https://www.investopedia.com/terms/l/loan.asp) only up to a certain time, after which the borrower alone assumes responsibility for the remaining payments and suffers the consequences of defaulting.

A limited guarantor may also only be responsible for backing a certain percentage of the loan, referred to as a penal sum. This differs from unlimited guarantors, who are liable for the entire amount of the loan throughout the entire duration of the contract.

### Other Contexts for Guarantors

Borrowers with good credit histories can also use guarantors. Pointedly, landlords frequently require first-time property renters to provide lease guarantors. This commonly occurs with college students whose parents assume the role of the guarantor, in case the tenant is unable to make the rent or prematurely breaks the [lease](https://www.investopedia.com/terms/l/lease.asp) agreement.

## Comparing Guarantors and Co-signers

A guarantor differs from a [co-signer](https://www.investopedia.com/terms/c/co_sign.asp), who co-owns the asset and whose name appears on titles. Co-signer arrangements typically occur when the borrower’s qualifying income is less than the figure stipulated in the lender’s requirements. This differs from guarantors, who step in only when borrowers have sufficient income but are thwarted by lousy credit histories. Co-signers share ownership of an asset, while guarantors have no claim to the asset purchased by the borrower.

However, in the event the borrower has a claim against a third party that has caused the default, the guarantor has the right to invoke a process called [subrogation](https://www.investopedia.com/terms/s/subrogation.asp) (“step into the shoes of the borrower”) to recover damages.

For example, in a rental agreement, a co-signer would be responsible for the rent from day one, whereas a guarantor would only be responsible for the rent if the renter fails to make a payment. This also applies to any loan. Guarantors are only notified when the borrower defaults, not for any payment before that.

> **Important**
>
> In the event of a default, the guarantor’s credit history may be adversely affected, which may limit their chances of securing loans in the future.

A co-signer takes on more responsibility because they are liable from the start. A guarantor is only responsible if the borrower defaults.  

## Pros and Cons of Serving As a Guarantor

In an agreement with a guarantor, the advantages usually lie with the primary party in the contract, whereas the disadvantages usually lie with the guarantor. With a guarantor, loans or agreements are more likely to be approved quickly. Most likely, it can allow for borrowing more and receiving a better [interest rate](https://www.investopedia.com/terms/i/interestrate.asp). However, loans with guarantors tend to have higher interest rates.

> **Tip**
>
> In a rental agreement, one way to avoid needing a guarantor is by paying a few months of rent upfront if you are in a position to do so.

The disadvantages lie with the guarantor. If the borrower fails to pay, the guarantor must cover the amount. If you can't make the payments, you remain liable, your [credit score](https://www.investopedia.com/terms/c/credit_score.asp) may drop, and legal action could be taken. Also, if you guarantee a loan, then your ability to borrow additional money for something else is limited because you are tied to an existing obligation.

Pros

*   Helps a borrower obtain a loan or a rental much easier
    
*   Allows for the ability to borrow a higher amount
    
*   Can help the borrower improve their credit history
    

Cons

*   Guarantor may be liable for the outstanding obligation
    
*   Guarantor’s credit score could be negatively impacted
    
*   Ability to obtain another loan for separate use is limited
    

## Is a Guarantor a Co-signer?

Though the terms are used interchangeably, they are different. A co-signer takes on equal responsibility in an agreement, co-owns the asset, and is responsible for payments from the start of the agreement. A guarantor is only responsible for payments once the primary party of the agreement defaults and is then notified by the lender. A co-signer has more financial responsibility than a guarantor.

## Is a Parent a Guarantor?

A parent can act as a guarantor and often does for a child for their child’s first rental property, as the child’s income is usually not high enough at a young age.

## How Do You Qualify As a Guarantor?

Different agreements and different lenders have different requirements for a guarantor. At a minimum, a guarantor will need to have a high credit score without any issues in their [credit report](https://www.investopedia.com/terms/c/creditreport.asp). They will also have to have an income that is a certain multiple of the monthly or annual payments.

## How Much Do You Need to Earn to Be a Guarantor?

There is no specific amount that an individual needs to earn to be a guarantor. The amount relates directly to the loan in question or the rent on a property. For rental agreements, [landlords](https://www.investopedia.com/terms/l/landlord.asp) usually expect the guarantor to have an annual income that is at least 40 times the monthly rent.

## What Happens If a Guarantor Cannot Pay?

If a guarantor cannot pay, both they and the tenant are liable for the obligations. The [lender](https://www.investopedia.com/terms/l/lender.asp) will begin collection proceedings against both the guarantor and the tenant, which will adversely impact the credit profile of both.

## The Bottom Line

A guarantor is someone who ensures loan obligations are met if the borrower defaults, providing reassurance to lenders. They must possess a strong credit history and sufficient income. The benefits for borrowers using a guarantor are faster loan approval and potentially higher borrowing limits.

There are serious risks involved for guarantors, including potential legal action and negative impacts on credit scores if the borrower defaults.

A guarantor and a co-signer are different. A co-signers co-owns the assets while a guarantor's doesn't. And the guarantor's responsibility only comes into play if the borrower fails to meet their obligations.