What are guar­an­tors?

Put simply, in non-technical language: A guarantor is a third party who signs to “support” someone signing a contract on renting a flat, for example. “Support” is offered to both parties signing the contract – so, for example, if a student signs a rent contract, and for some reason can’t pay their rent, they and the lessor can be reassured that the guarantor can jump in to pay the rent instead. Guar­an­tors can come into effect in many business en­vi­ron­ments, such as for bank loans, or rent contracts, for example. This article will look closer at the com­plex­i­ties of being a guarantor and what a guarantee is.

To expand on the basic in­tro­duc­tion above, here is a more technical de­f­i­n­i­tion, to introduce some of the terms you may come across:

A trans­ac­tion concluded between two parties does not nec­es­sar­i­ly require a guarantor. However, if one of the two parties first provides a service (grants a loan, rents an apartment, etc.) and demands a guarantee from a third party to secure the con­sid­er­a­tion, a guarantor is usually required. This must first be accepted by the con­trac­tu­al partner who wishes to be secured by a guarantee, so not just anyone can act as a guarantor. There are various parties who can act as a guarantor: private persons, as well as busi­ness­es which offer this as a service.

In the case of a private guarantee, a private in­di­vid­ual usually assumes a guarantee for another person close to them, such as a family member of the debtor. Anyone who accepts such an oblig­a­tion under these cir­cum­stances should inform them­selves thor­ough­ly about the scope of their de­c­la­ra­tion of intent, i.e. the rights and oblig­a­tions as guarantor, and should also know the financial situation of the principal debtor before signing the de­c­la­ra­tion of guarantee. Es­pe­cial­ly in families, it is easy to make a guarantee com­mit­ment for one's own children, siblings, or parents without con­sid­er­ing the resulting legal con­se­quences. In the worst case, this can lead to un­ex­pect­ed financial problems and family disputes. What are the kind of guarantee?

This form of personal guarantee means that the guarantor agrees that the lender can request the full amount lent, plus legal fees from the guarantor. So, if a person cannot pay their rent, their guarantor will have to pay all of the rent, as well as any incurred costs (reminders or warning charges), for example, which the renter has not paid. In the case of a business, if a loan owed is $75,000, and the lender hires legal as­sis­tance to ascertain whether they can recall the money from the business who cannot pay their loan back, which costs $10,000, the guarantor owes $85,000. This is a high-risk form of guarantee for the guarantor, but many lending-bodies prefer it, for obvious reasons.

Instead of an unlimited personal guarantee, there is an option to provide a limited personal guarantee. These are usually used in business contexts. The guarantor and lender determine a set amount which can be collected by the lender, in the case that the first party cannot repay a loan, for example. So that the lender does not lose money, a limited guarantee often involves a joint guarantee with other parties. Here, it’s important to note whether the guarantor is signing a several guarantee or a joint and several guarantee. With a several guarantee, each party within the joint guarantee contract will have a per­cent­age of liability which is de­ter­mined before the signing. This means that a guarantor will be fully aware of the worst-case scenario, and how much they will have to pay if things go wrong. On the other hand, a joint and several guarantee is not as clear, as it is possible that any of the parties signing the guarantee will have to pay the amount in full. The lending party will be able to recover what they lent in full, and they can do this by demanding the full amount from any of the guar­an­tors who sign the joint and several guarantee. This option is an option which most lenders will find appealing.

In principle, any adult with the capacity to contract can act as guarantor. To do this, they must of course be suf­fi­cient­ly fi­nan­cial­ly well off, otherwise they won’t provide any added security for the party providing the loan or lease. There are some more specific re­quire­ments too, which will be covered in the following.

Financial solvency is often a difficult re­quire­ment to meet, es­pe­cial­ly for people with poor financial back­grounds who live in cities with high rents. With the average rent for a one-bedroom apartment in New York being $2,945, in Chicago $1,812, and in Philadel­phia $1,623, the salary for a guarantor needs to be $235,000; $144,960; $129,840 for the three cities re­spec­tive­ly. That is to say, the guarantor needs to make annually a minimum of 80 times the monthly rent they are signing as guarantor for. As a student or young person it may be unlikely that you know someone with this income, so getting a private person to be your guarantor isn’t always an option. Instead, you may be able to hire a guarantor, although this will cost money. Because of this it may be more appealing simply to look for the right landlord, who is more un­der­stand­ing of your situation: maybe a tough path to choose in cities with a com­pet­i­tive rental market, but a safer option in more relaxed cities.

Guar­an­tees are legal documents, and as such they need to be drawn up rig­or­ous­ly. Some guar­an­tees can be withdrawn; it all depends on the wording. Unless a guarantee states ex­plic­it­ly that it cannot be withdrawn, that it is “ir­rev­o­ca­ble,” it may be withdrawn at any time. Paying attention to this detail is of high im­por­tance. Personal guar­an­tees, even guar­an­tees which are ap­par­ent­ly limited guar­an­tees, are often in­ten­tion­al­ly vaguely worded. This may end up with you as a borrower having to account for pro­vi­sions and re­quire­ments which you wouldn’t think of, and which aren’t im­me­di­ate­ly clear on first reading. This makes getting legal advice a good idea when agreeing to be a guarantor, to avoid ending up in a tricky situation.

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