If you’ve come across the term “guarantor,” you might wonder what it actually means in real life. At its core, a guarantor is someone who agrees to step in if another person cannot meet a financial obligation.
This role shows up in different situations, including loans, rental agreements, and other types of contracts. In each case, the goal is the same: to give the lender, landlord, or provider more confidence that payments will be made.
One of the most common places you’ll see guarantors is when renting a home or apartment. In those cases, having a guarantor can make it easier to get approved if you don’t meet certain requirements.
Guarantor Definition
What does “guarantor” mean? A guarantor is someone who agrees to take responsibility for a financial obligation if the original borrower or account holder cannot make payments.
This type of agreement can apply to many situations, including rental leases, loans, and other financial contracts. The guarantor does not make payments upfront but agrees to step in if payments are missed or the agreement is broken.
Because of this role, a guarantor helps reduce risk for lenders, landlords, or service providers.
Where Are Guarantors Used?
Guarantors are used in several types of financial agreements where there is some level of risk. Common examples include:
- Rental leases for apartments or homes
- Personal, student, or business loans
- Credit accounts in some cases
- Mortgages or large financing agreements
- Utility accounts or service contracts
In each case, the guarantor provides an extra layer of assurance that the balance will be paid if the primary person cannot pay.
When Do You Need a Guarantor?
One of the most common situations where a guarantor is required is when renting a home or apartment. Landlords often use guarantors to reduce risk when an applicant does not fully meet their requirements.
You might be wondering, “Do I need a guarantor if I have bad or no credit? What if my income is too low?”
Different landlords set their own requirements. However, here are some common situations where you may be asked to have a guarantor:
You Have Poor Credit or a Short Credit History
Many landlords will want to check your credit before renting to you. Some have minimum score requirements. Others may assess credit reports on a case-by-case basis.
Either way, a low credit score or a lack of credit history could lead to a denied application. Alternatively, a landlord might approve you if you have a guarantor.
You Don’t Have Any Rental History
Landlords and property managers assume a risk when renting housing. Most of the time, they’ll want to see that you’ve successfully rented from someone in the past.
Is this your first time renting a house or apartment? If so, some landlords might insist that you have a guarantor.
You Don’t Meet the Income Requirements
Your income is one of the most important considerations to landlords and property managers. Typically, your gross monthly income must be at least three times the monthly rent.
This requirement is to make sure you have at least some financial buffer. When your finances aren’t stretched too thin, you’re less likely to default on the lease.
You Don’t Have a Stable Employment History
Income matters when it comes to housing applications. However, if you sign a lease and immediately lose your job, you could be in trouble. That’s why many rental companies and landlords want to see evidence of a stable employment history.
Do you frequently change jobs or have large gaps in your employment history? That could be a red flag. Having a guarantor assures the landlord that your rent will be paid, even if you run into employment problems.
What Qualifies You as a Guarantor?
What does being a guarantor mean? Simply put, if a leaseholder defaults on payments, a guarantor steps in and pays the lease.
This is a big responsibility, and not everyone can serve as a guarantor. Landlords will usually look for the following:
- Good credit
- Enough income to cover lease payments if needed
- A stable employment history or other source of steady income
Even if you qualify to serve as a guarantor, that doesn’t necessarily mean that you should. Whether you’re being asked to be a guarantor or you’re considering asking someone, it’s important to understand the risks involved.
What Are the Risks of Being a Guarantor?
“Can I use a friend as a guarantor?” It’s a logical question. If the friend agrees, you can. However, being a guarantor comes with substantial risks. If you stop paying rent, the guarantor has to pay the rest.
In many cases, the guarantor may be on the hook for more than just unpaid rent. For example, if you damage the apartment and refuse to pay for it, your guarantor may have to.
Who Can Serve as a Guarantor?
Being a guarantor is a major responsibility. Most people are only willing to take on that level of risk for someone close to them. In many cases, a renter’s guarantor is a parent, spouse, sibling, or close friend.
Unfortunately, not everyone can ask a loved one to serve as a guarantor. Some friends and family members may understandably be worried about the risk. In other cases, your friends and family might want to help but lack the means to do so.
If you don’t know anyone who can serve as a guarantor, you may be able to work with a guarantor service. These services will guarantee your lease, but they require an upfront payment to do so. Usually, that payment is anywhere from 4% to 10% of the annual rent.
The Right Guarantor Can Expand Your Opportunities
Hopefully, you now understand the guarantor definition. If you’re applying for housing but keep falling short of the requirements, it might be time to start looking for a guarantor.
Whether it’s a loved one or a service, having a guarantor can help you secure housing and start building a positive rental history.
