Guarantor
What does it mean
A Guarantor is an individual or entity offering extra assurance to the bank for repayment of a loan. They commit to taking on the loan liability if the borrower fails to meet obligations. In community banking, guarantors are often the owners of the business applying for the loan.
Why does it matter
A Guarantor is a secondary form of repayment for a bank loan, and in situations where the borrower struggles, it is good to have a qualified guarantor for the bank to fall back on to ensure it’s loan gets repaid.
There are two different variations of guarantees to be aware of:
- Unlimited/Limited - Unlimited/Limited guarantees refers to how much of the debt the guarantor is willing to step in for. In unlimited guarantees, the guarantor is liable for the full amount of the loan. In a limited guarantee, the guarantor is liable for only a portion of the loan amount. Limited guarantees can come in different flavors, but typically these guarantees will either be based on a percentage of the total loan or it will be a set dollar limit.
- Unsecured/Secured - An unsecured versus secured guarantee relates to whether or not the guarantor backed up the value of their guarantee by formally pledging assets. In an unsecured guarantee scenario, the bank just receives the guarantors word that they would step in if the borrower is unable to meet their obligations.
In most guarantee situations, the guarantor will be one of the following:
- Unlimited / Unsecured - The guarantor is fully liable for the debt, but they do not directly backup their guarantee by pledging assets. This is the most common guarantee type.
- Unlimited / Secured - The guarantor is fully liable for the debt, and they backup their guarantee by pledging assets.
- Limited / Unsecured - The guarantor is partially liable for the debt, but they do not directly backup their guarantee by pledging assets.
- Limited / Secured - The guarantor is partially liable for the debt, and backup their guarantee by pledging assets.
Other Relevant Terms
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