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Like guarantors, co-borrowers or cosigners hold similar roles by minimizing a lender’s risk of extending credit. For instance, if a student received a Federal Stafford Loan and defaulted (did not pay in full), then the federal government will compensate the lender. Some federal student loans represent a type of guarantor loan as the federal government guarantees that lenders will be paid. Private student loans–those not guaranteed by the government–might require a cosigner before approving a loan. Hence, the student and the cosigner are responsible for paying the loan.
Friends and family members can serve as guarantors. Their credit ratings, assets, expenses and references often are evaluated to determine if they qualify. The advantage is that the applicant will receive financing when the guarantor is approved. However, if the applicant defaults or fails to pay the loan, then the guarantor can become liable for the debt.
When faced with mounting debts, some people file bankruptcy in lieu of paying their loans. Certain loans will not be discharged through bankruptcy, such as federal student loans. Another obstacle involves business loans, such as those made by a sole proprietorship. If a business owned by a single individual takes out a guarantor loan, then the owner might be personally liable for business debts. For instance, instead of turning to the guarantor, the business might forfeit personal assets, like real estate or cars, to satisfy the debt.
Guarantor loans affect debt-to-income ratios for both applicants and guarantors. Thus, a guarantor might not be able to get another loan if a lender considers the total debt-to-income ratio (including guarantor loans) as too high or risky.
Lenders have some discretion when deciding interest rates for guarantor loans. Interest rates generally correlate to the lender’s risk assessment. If a person is considered low-risk, then the best interest rates can be available. The interest rates used on guarantor loans will be affected by the guarantor’s credit. For instance, an applicant with poor credit might qualify for a lower interest rate based on the guarantor’s credit rating and income.