When an entity wants to make a purchase or apply for a loan, he may not necessarily be allowed to do so immediately, especially if his ability to meet financial obligations is put into question. In such a situation, it may be necessary to get a third party into the picture in order for the transaction to proceed. This party is known as a guarantor. A guarantor’s role is to ensure that payment obligations are met, no matter how well or how badly the borrower fulfils his responsibility to complete payments in a timely manner. This means that if the borrower defaults on his loan, the guarantor will have to shoulder the amount still owed to the lender until the full amount owed has been paid.
The need for a guarantor usually arises when the borrower is unable to prove by himself that he is capable of meeting his payment obligations. This may not just come about as a result of having a bad credit rating, but may also happen if the borrower has never had any experience with borrowing. Furthermore, asking for the help of a guarantor does not necessarily translate into approval of the loan, because even the ability of the guarantor to meet payment obligations has to be assessed first.
Since guarantors make the commitment to shoulder the payment obligations of other parties in the event of a default, they are put in a risky position. Before agreeing to become a guarantor, it is therefore important to assess the risks involved. If the borrower already has a poor credit history, it would be unwise to take on the role of a guarantor, unless one is ready and willing to take on the burden of paying the amount owed.