What is a Guarantor in Canada?

Here we explore the meaning of a guarantor, the different types, and the pros and cons of using a guarantor.

A guarantor is someone who agrees to pay a borrower’s debt if the borrower defaults on their loan. The guarantor uses their assets as collateral for the loan. In some rare instances, a person acts as their own guarantor by pledging assets against the loan. The terms “guarantor” and “surety” are often used interchangeably.

A guarantor guarantees to cover a borrower’s debt if the borrower does not fulfill their loan repayments. This guarantee involves pledging their assets as collateral. Additionally, guarantors may verify the identity of those seeking job placements or passport acquisition.

A guarantor is generally over the age of 18 and resides in the country where the payment agreement is in place. They typically have excellent credit histories and sufficient income to cover loan repayments if the borrower defaults. If borrowers make late payments, the guarantor may also be liable for additional interest or penalties.

Types of Guarantors

Guarantors can be involved in various scenarios. They may assist people with poor credit histories or those lacking sufficient income. The extent of a guarantor’s liability can vary. A guarantor can be liable for the entire loan amount or only a portion of it.

In other contexts, guarantors may help people secure jobs or obtain passport documents. Here, a guarantor certifies that they know the applicants personally and verifies their identity by confirming photo IDs.

A guarantor’s liability can be limited or unlimited based on the loan agreement terms. A limited guarantor may guarantee a loan only for a specific period. After this period, the borrower assumes sole responsibility for the remaining payments. Limited guarantors may also only be responsible for a specific percentage of the loan, known as a penal sum. Unlimited guarantors, however, are liable for the entire loan amount throughout the contract’s duration.

Guarantors are not exclusively used by borrowers with poor credit histories. For instance, landlords often require first-time renters to provide a lease guarantor. This commonly applies to college students whose parents assume the guarantor role, ensuring that rent will be paid if the tenant cannot fulfill their obligations.

Guarantors vs. Co-signers

A notable difference exists between a guarantor and a co-signer. Unlike a co-signer, a guarantor does not have a claim to the asset bought by the borrower. If the borrower defaults, the guarantor becomes liable for the remaining obligation, which they must fulfill. Failure to do so can result in legal action against them.

Co-signers are typically involved when the borrower’s qualifying income is lower than required. Guarantors, on the other hand, usually come into play when the borrower has a sufficient income but a poor credit history. Co-signers share ownership and responsibility from the beginning of the agreement, while guarantors only step in if the borrower defaults on the loan.

In rental agreements, a co-signer shares responsibility for rent payments from the start, whereas a guarantor only becomes responsible if the renter fails to pay. For loans, guarantors are only alerted if the borrower defaults, not for any initial payments. A guarantor’s credit history can be adversely affected if they need to fulfill the loan obligations, potentially limiting their ability to secure future loans.

Advantages and Disadvantages of Guarantors

The advantages of having a guarantor generally benefit the borrower. A guarantor increases the probability of loan approval and can speed up the process. It might also allow one to borrow larger amounts or secure better interest rates. However, loans with a guarantor often come with higher interest rates.

The disadvantages predominantly affect the guarantor. If the borrower defaults, the guarantor must cover the obligation. If the guarantor fails to pay, their credit score will suffer, and they could face legal action. Additionally, being a guarantor limits their ability to borrow money for other purposes since they are tied to an existing obligation.

Guarantor Criteria

A guarantor must meet specific criteria, which vary among agreements and lenders. Generally, a guarantor should have a high credit score and no issues in their credit report. Their income must also meet a certain multiple of the monthly or annual payments. There is no fixed income requirement to be a guarantor. It depends on the loan or rent in question. For rental agreements, landlords typically expect the guarantor’s annual income to be at least 40 times the monthly rent.

Consequences of Failing to Pay

If a guarantor cannot meet the payment obligations, both they and the tenant face liability. The lender will initiate collection proceedings against both parties, adversely impacting their credit profiles.