Understanding the Differences Between Co-Borrowers and a Guarantor

Applications for loans may be signed in conjunction with a co-borrower or guarantor. This usually makes the loan more secure and assures the lender that the loan will be paid back in case the principal borrower defaults. However, if you are planning to help your friend or family member to guarantee a loan, you should know the implications of signing as a co-borrower or as a guarantor. Here is a brief explanation of the major difference between co-borrowers and a guarantor. 

Who is a Co-Borrower?

A co-borrower is liable to repay the entire debt with the original borrower whether the borrower defaults or not. Although the principal borrower always undertakes to pay back the entire debt, the co-borrower bears an identical financial and legal responsibility as if they had taken the loan themselves.

Who is a Guarantor?

A guarantor is a person who signs a contract of guarantee on behalf of a borrower. This contract of guarantee is a promise made by the guarantor to the lender that the borrower will abide by all terms and conditions in the credit contract. If the borrower defaults, and cannot pay back the loan, the terms of the contract of guarantee obligate the guarantor to pay the lender the money owed by the borrower.

Guarantors may sign a secured or unsecured guarantee depending on the demands of the lender. Under a secured guarantee, the lender requires the guarantor to pledge assets as a collateral to secure the guarantee. If the borrower cannot meet up with the payment and the guarantor cannot pay back the debt, this type of guarantee permits the lender to sell the assets to recover the money owed by the borrower. However, an unsecured guarantee does not require the guarantor to pledge any form of collateral to make the guarantee more secure. With an unsecured guarantee, the lender must obtain a court judgement against the guarantor before selling any of their assets to recover the money owed by the borrower.

Differences Between a Co-Borrower and a Guarantor

The main difference between a co-borrower and a loan guarantor is that the co-borrower is always liable for the payment of the loan whether the principal borrower pays back or not. If the principal borrower cannot pay at all or starts to default, the lender can request for full payment from the co-borrower. However, a guarantor, is not liable until the principal borrower defaults and the lender has taken all necessary steps to collect the payment. To get the guarantor to pay back the loan, the lender would have to prove that the principal borrower has defaulted.

Moreover, the guarantor is permitted to recover from the defaulting borrower, all the money that has been paid to the lender. But the co-borrower may only recover from the borrower half of the debt they paid to the lender. In addition, a guarantor may be released from the initial contract of guarantee before the loan term ends. Usually, after the borrower has built up some equity in a piece of real estate (approximately 30 percent), the guarantor may be released from the terms of the contract of guarantee. A co-borrower does not enjoy this privilege.

When taking a large personal loan or signing as a co-borrower or guarantor for a close friend or family member, it is very important to seek for legal and professional financial advice. A lawyer or personal finance expert can help you have a deeper understanding of the risks involved and help you to protect your personal assets.

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