What is the difference between a guarantor and a co-signor?

Are you thinking or getting a loan, or, maybe a family member needs a hand? Do you know a difference between a guarantor vs. co-signor? These two terms seem to cause a lot of confusion between borrowers. But, if you want to avoid issues, or select the right loan for your needs, then you have to be familiar with the necessary financial terminology.

Each bank offers different lending criteria, and you have to be familiar with them. So, in this article, we will help you discover the difference and ensure your financial stability.

Co-signer

The majority of banks or lenders will ask from you to provide a person who will co-sign the loan for you. With this action, they are making a powerful statement that they unsure of granting you a loan, for whatever the reason. It could be your credit card, bad credit rating and they will ask for someone to co-sign on your credit, which will reduce the risks and enable the bank to retrieve their money if something happens.

In most case, the co-signor is a family member. It may be one of your parents, or someone you are close to and they also need to have an excellent credit rating. Otherwise, they won’t be suitable for this purpose. When someone co-signs a loan, he is responsible for the repayment, if you miss any of the monthly installments, or you are unable to repay the loan.

Whether you are a co-signer or a lender, you have to be careful when these things are in order. You have to think about the effects of being a co-signer because are more far-reaching then one might expect. It’s not only about the repaying the loan, but the account can be reported on your credit file as well.

This action can reduce your credit score, or limit your ability to borrow in the future.

Guarantor

When it comes to differences between a guarantor and a co-signer, they are quite similar. This means that if a borrower can’t make a payment, the bank or lender will seek the amount from the guarantor. In this case, you agree to a traditional guarantor loan.

thMany banks will require a guarantor to approve a loan, same as co-signor. However, the guarantor can have a week, poor or no credit rating. One of the differences between a guarantor and a co-signer is the example when someone is starting a new business.

For example, a CEO of a business owner goes to bank ask for a loan to start a business or aid its growth. Considering the business is new and doesn’t have a financial track record, the bank may ask the CEO to guarantee the loan. In this case, if the company fails, the person who guaranteed the loan will be responsible for the payment.

Once again, the bank is secured and reduces the risk. It also increases a guarantor’s liability if the business is unable to repay the lent amount. We have another example of guarantor being used. If you are trying to rent a flat or house, a landlord may request a guarantor to ensure that rent is paid on time.

The significant difference we should mention when it comes to guarantor’s loan is that if the payment is missed, then the credit goes directly to the guarantor for the payment, while the borrower is almost out of the picture.