Let’s start with the definition

A Guarantor is a term used to describe someone who pledges to pay a borrower’s debt should the borrower(s) default on a loan. This usually occurs by offering their own assets against a loan. A Guarantor must be over 18 years of age and generally have a clear credit history with an income that’s substantially able to cover their own requirements plus the loan repayments on the guarantor loan should the borrower default.

Types of Guarantors

A guarantor may only guarantee a loan for a set period as opposed to the full term of a loan or for only a portion of the loan and is referred to as a “Limited Guarantor”.

The pros and cons

There are obvious pros and cons to being or having a guarantor, with the pros clearly in favour of the borrower. These include the increased likelihood of being approved for a loan, avoiding mortgage insurance and possible greater borrowing capacity.

While the cons are relatively clear, such as the responsibility to assume the debt should the borrower default, other issues such as credit history being affected and in obtaining a loan should this occur, are considerations often overlooked and not taken into account by a guarantor. It is best to know the specifics of what you are liable for in the event of a mishap and get legal advice in relation to the documentation.