Coborrower vs Guarantor

The difference between a guarantor and a co-borrower

In car finance, applications for finance take take the form of a single borrower, or a co-borrower or guarantor scenario. Both these finance options provide additional security for the finance of the car a factor increasing an applicants chance of securing car finance.

Your finance company may require you to either find a coborrower or go coborrower on a loan. It is important to understand how such agreements operate and the respective rights and obligations of various parties involved.

In some loan applications the borrower may not meet the financial lending institution's criteria. This may be due to several reason, possibly because of a limited credit history (for new drivers) or a blemished credit record. A common solution is for the borrower to approach a third party to support the loan request. Whether asked to be a guarantor or a co-borrower, the third party is taking on a responsibility in relation to the loan. Both a guarantor or coborrower is a separated relationship, and distinctions are to be drawn.

The difference

A co-borrower is responsible for the repayment of the entire debt along with the borrower and is subject to identical financial and legal ramifications to the borrower in the event of missed payments or a default. Even though the principal borrower undertakes to repay the entirety of the debt themselves, the situation of the co-borrower with respect to obligations to repay the loan is the same as if they taken the loan out themselves. It is common for spouses or partners to become co-borrowers on a loan; all payments are the joint responsibility of both. If payments stop, the lender can sue either for full payment.

A guarantor, by contrast, is not liable on the loan at all, except in the event of the borrower defaulting. Should this happen, the guarantor bears full responsibility for paying off the entirety of the loan. Until the finance company can prove the borrower has defaulted on the loan the guarantor is not liable. While on the surface it may appear a guarantor has more limited obligations than a coborrower in car financing, quite often a guarantors rights and obligations arise on the default of the loan if that were to occur.

Being a guarantor

Becoming a guarantor of someone's loan is not like being a reference on their CV or countersigning a document for them. By signing the 'contract of guarantee', you take on the legal responsibility of making sure the loan is repaid. You essentially provide the last line of defence, both for the borrower and for the finance company.

In some cases, you will be asked to pledge collateral in what is called a secured guarantee. In the event of you being unable to pay off the borrower's debt once they have defaulted, the lender is able to recover the amount owed by selling your assets. In the meantime, throughout the lifetime of the loan you cannot sell the asset without the lender's permission, as you have no ownership in the vehicle or other asset being secured.

It is also worth considering the effect that becoming a guarantor will have on your own credit score. The loan will show up on your credit record, and could potentially affect your own capacity to secure finance, as it is a further financial commitment that you may be asked to be responsible for.

The best way to think about supporting someone else's credit application, whether as a guarantor or as a co-borrower, is to treat it as if you were taking out the loan yourself. Ultimately, that's the responsibility you are taking on.

Point to consider;

NB In Australia, the term 'co-signer' is interchangeable with 'co-borrower', and you will see both terms used when discussing this topic. They mean the same thing.
Elsewhere, however, including in the United States, 'co-signer' is almost identical in meaning to 'guarantor', not 'co-borrower'. So when researching on-line, be sure to ascertain the origin of the information you are reading.