You may have heard the term “guarantor” before, but what does it actually mean? A guarantor plays a crucial role in various financial transactions, from apartment rentals to loans and credit applications.
Read on to explore the guarantor meaning and how it can impact your financial responsibilities. Because being a guarantor is a very big deal.
Personal guarantees are often required by banks giving loans or landlords or other loans to new businesses. This is intend by them to get around the LLC protection.
A guarantor takes responsibility for fulfilling the obligations or debts of another party if that debtor cannot. This role comes with significant commitments, involving a legally binding agreement to meet the obligations.
Guarantors are neither sureties nor co-signers. The lender can pursue the surety immediately if the borrower defaults, but they can only seek a guarantor after failed attempts to collect from the borrower. Moreover, a co-signer shares ownership of the asset with the borrower, but a guarantor does not.
What To Consider
Being a guarantor has potential drawbacks. If things go awry, you may have to cover the debt, loan, or lease and even face collections or lawsuits. Additionally, default payments can negatively impact your credit score and ability to apply for credit.
As mentioned, being a guarantor doesn’t grant you ownership rights to the assets you guarantee. Therefore, carefully consider your options and only agree to be a guarantor if you trust the borrower and can cover their debt.
Qualifying as a Guarantor
A high credit score and a stable employment history are essential factors that creditors and landlords look for in potential guarantors. Lenders often require guarantors to earn a specific level of income, usually a certain multiple of the borrowed amount. They need assurance that you have the financial means to cover the borrower’s payment.
Guarantor When Using an LLC
A personal guarantee overrides your LLC protection. Meaning, that you would be personally liable even though you have an LLC. If you don’t already have an LLC protecting your personal assets, get one now! And then avoid personal guarantees if at all possible.
Read here to understand what an LLC does and does not protect.
Benefits of Being a Guarantor
Being a guarantor comes with benefits, especially for the person borrowing money. A guarantor can increase the chances of approval for those with a low credit score or insufficient income to meet the requirements themselves. The lender views the guarantor as additional security and assurance for the debt repayment.
Being a guarantor can also help build trust and strengthen relationships, such as between family and friends. By guaranteeing for someone, you show your faith in their ability to rebuild their credit and fulfill their financial obligations, which can be a meaningful gesture of support.
Understanding the meaning of a guarantor is crucial when considering this role, as it entails substantial responsibilities and potentially you personally owing lots of money. Before agreeing to be a guarantor, carefully assess the situation and your financial stability to make an informed decision.