In a broad sense, a guarantor is a person who co-signs (guarantees) a debt incurred by someone else, stating that they will make the payments and fulfill the obligations of the borrower in the event they stop paying. In practice, guarantors are most commonly used for the purpose of co-signing leases and loans for borrowers with either credit or income limitations. Here's why you might need a guarantor, what qualifications they'll need, and whether or not it's a good idea to use one.
Continue Reading Below
Why use a guarantor?
People use guarantors to co-sign debt obligations for two reasons: either they don't have adequate credit to qualify for the loan they want, or they can't document sufficient income to justify the loan.
For example, let's say that in order to take advantage of a 0% APR special on a certain auto loan, a finance company requires a minimum credit score of 700. A borrower with a 550 credit score could potentially qualify for a loan, but with a much higher interest rate and payment. So he or she could bring a guarantor who happens to have a sufficient credit score to take advantage of the promotional interest rate.
Or, for an example of an income-related guarantor, let's say a 22 year old just graduated from college and wants to get their first apartment near where they'll be working. Well, in order to qualify for an apartment lease, you generally need decent credit and enough documented income to show you'll be able to pay your rent. So if the 22 year old can't document any income yet because they just started a job, it may be necessary to bring on a guarantor, such as a parent, in order to meet the income qualifications.
Who can be a guarantor?
As far as credit is concerned, the answer is easy: You can generally use any adult who meets the particular credit standards as a guarantorfor the loan or lease you're applying for.
Income is another matter. If you need to use a guarantor for income purposes, they'll need to have sufficient income to pay the obligation they're co-signing for in addition to all of their own obligations.
Continue Reading Below
For example, let's say that your apartment complex requires income that is three times the amount of your rent, and that the apartment you have your eye on costs $1,000 per month. If the guarantor also has housing expenses of $1,000 per month, expect the apartment complex to look for monthly income of $6,000 ($2,000 times three) from that person. Of course, this is a simplified example, and different apartment complexes have different policies, but you get the idea.
A word of caution
Even if a friend or family member is willing to co-sign a loan for you, it doesn't mean that it's a good idea. If for whatever reason you are unable to pay back the debt, it becomes their burden -- and this could place a huge strain on your relationship with that person.
So before you ask someone to be your guarantor, make sure you're almost 100% certain that you'll be able to meet your obligation.
The article What is a Guarantor and Should You Use One? originally appeared on Fool.com.
Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
Copyright 1995 - 2015 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.