A person can act as a guarantor of a loan given to another person by pledging to repay the loan or providing additional collateral in case the primary borrower defaults, explains Duhaime's Law Dictionary. A guarantor is different from a cosigner in that the guarantor's contract to pay if the primary borrower defaults is typically directly with the lender.Continue Reading
One of the most well-known guarantors is the U.S. government, which guarantees to repay federal student loans if a student defaults. The government doesn't sign the student's loan documents as a cosigner; instead, it makes a pledge to act as a backup payee directly with the lending institution, reports Wikipedia.
Some guarantors only have requirements to pay defaulted loans after the lenders have exhausted all collection efforts against the primary borrowers. However, some contracts allow lenders to go after the borrowers or guarantors immediately upon default, notes the Utah Department of Financial Institutions.
Business loans provide special examples of loan guarantees. Banks often ask small-business owners with businesses organized as independent legal entities to personally guarantee the loans to the businesses. This means a bank can go after the assets of a business or the personal assets of the business owner for repayment, according to Nolo.Learn more about Credit & Lending