Guarantor vs Cosigner: What’s the difference, and who’s better?

Posted 17.05.2023

Guarantor vs Cosigner: What’s the difference, and who’s better?

Is your credit, income, or rental history not enough for your loan application or lease agreement? Guarantors and cosigners may pave the way for you. Identifying the differences between a guarantor vs a cosigner can help you choose who’s better for your situation.

To help you decide which one is right for you, we define guarantors and cosigners and differentiate between the two.

Key takeaways

Guarantor	Cosigner
Signs the loan agreement or lease	Signs the loan agreement or lease
Friends, relatives, or a third-party company	Friends, relatives, or roommates
Only responsible to make payments when the primary borrower defaults or is at risk of default	Immediately responsible for the loan

What is a guarantor?

A guarantor is someone who assumes financial responsibility for your monthly loan payments or rent payments. Usually, you can have a friend, a family member, or even a third party as a guarantor. If you have no or poor credit history or low income, a guarantor can help with your loan application or lease.

With loan applications, they act as a safety net for lenders in case you default on your loan. They are legally bound to repay the loan if you, the primary borrower, can’t anymore. But they don’t have ownership of the loan and anything you purchased using the fund. Note that not all lenders accept guarantors when taking out a personal or auto loan.

In terms of leases, they assure landlords that payments are made if the tenant fails or there are damages to the property. While they sign the agreement, remember that a guarantor can’t occupy the rental property or live with you as a tenant.

What is a cosigner?

On the flip side, a cosigner is a close friend or family who accepts equal responsibility from day one. Ideally, your cosigner should have a good credit score and a steady income. This can help strengthen your loan application or lease agreement if you don’t meet the requirements of the lender or landlord.

Since cosigners are immediately obligated, any late or missed payments on the primary borrower or lessee’s rent or loan also affect their credit. Let’s say that you pay rent late; this can appear on your and the cosigner’s credit reports.

Unlike a guarantor, a cosigner can occupy the apartment or live with you as a tenant if you apply for a lease. For example, if you cosign with your sibling, they can stay with you in the unit, and you can divide paying rent.

Is it better to have a guarantor or cosigner?

Both a guarantor and a cosigner can pave the way for your application. When choosing between the two, the bottom line is your situation.

When to choose a guarantor

When you apply for an installment loan, a guarantor is helpful if you need a leg up with your application. Particularly, if you have poor credit, you can ask a close friend or relative to be a guarantor.

This strategy works in your favor because lenders may offer you more favorable rates and terms. Let’s say your credit score is 515, and you only qualify for a 28.50% interest. If you have a guarantor with a promising credit history, lenders may reduce your interest rate to 19.90%. In turn, this reduces your monthly payments and overall loan.

Additionally, if your friend or family doesn’t approve of immediately sharing responsibilities, choosing a guarantor is also ideal. They only serve as a backup plan, so they don’t have to pay the loan with you from the get-go.

In case you’re looking to lease a property, a guarantor is more suitable if you want to live alone. Since a guarantor can’t be a tenant, you won’t have to share your living spaces.

Pros of a guarantor	Cons of a guarantor
A guarantor can bump up the approval of the loan application or lease.	The primary borrower’s and the guarantor’s credit scores can take a hit if both fail to pay.
Having a guarantor may also help a borrower qualify for lower rates and better terms.	Most landlords may require collateral from the guarantor. If both fail to pay rent, the guarantor could lose the collateral.
Guarantors are the last resort for lenders and landlords.	The guarantor can’t be a potential tenant.

When to choose a cosigner

If your finance is quite risky, you may consider having a cosigner instead. They are partly responsible for your loan or monthly rent, so they can support your payments. Because of this, you don’t have to shoulder all the financial responsibilities.

For example, you want to apply for a car loan, but your income is unstable. This is where a cosigner comes into play. Your cosigner can cover the portion of your payment that you can’t settle.

Also, having a cosigner is a great way to save money if you’re signing a lease. Let’s say the landlord asks for $1,250 in rent, but your friend acts as your cosigner. Instead of paying that $1,250 all by yourself, you can live with you and split the rent. Meaning you only have to pay $625 each.

Aside from rent, you can also agree to divide your utility bills, such as electricity and internet connections. Through this, you can reduce your overall monthly bills and save more.

Pros of a cosigner	Cons of a cosigner
A cosigner can help the borrower take out a larger loan amount and qualify for lower interest.	The borrower and cosigner’s credits can take a hit in case of late payments or default.
Instead of shouldering all the costs, both individuals can pay rent.	Since both assume liability, a cosigner’s debt-to-income ratio (DTI) can also be affected.
If signing a lease, the cosigner is a qualified tenant.	The relationship with the cosigner may be strained if issues arise.

Conclusion

Which one do you prefer — a guarantor or a cosigner? Both can help you boost your loan application or lease, but the difference lies in the financial responsibility they take. Getting extra help from a friend, relative, or a third party comes with risks. So, it’s important to set clear expectations with your cosigner or guarantor to avoid issues.

Guarantor vs cosigner: Frequently asked questions

Do guarantors and cosigners get credit checked?

A lender or a landlord will also assess your guarantor or cosigner’s credit as part of the screening process. Essentially, your guarantor or cosigner should have a good credit score and a stable source of income. This will help increase your chances of getting approved.

Who can be a guarantor or a cosigner?

A guarantor can be a friend, family member, spouse, or a third-party company. Meanwhile, cosigners are usually individuals, like your friends and family.

Does a guarantor affect credit?

Being a guarantor affects your credit score in two ways. If the primary borrower defaults, and you also can’t pay back the loan or rent, your credit could be negatively affected. On the other hand, if you meet those payments, it could improve your credit.

Does a cosigner affect credit?

Whether you’re the primary borrower or the cosigner, the loan would appear on your credit report. This is because cosigning a loan or lease means sharing equal responsibilities. Depending on how you handle the payments, this can either risk or improve your credit.

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

You can see a co-applicant as an additional applicant who is equally responsible for paying rent or the loan. Unlike a loan co-signer or guarantor, a co-applicant has access to the loan or asset purchased. For example, if you co-apply with your partner for a car loan, you can have joint ownership of the vehicle.

What happens if a guarantor or cosigner defaults or fails to pay rent?

Aside from the effect on their credit, a guarantor or cosigner may also face legal actions if they can’t make the payments.

Carla Soto

Carla is a skilled copywriter at BestFind with a background in marketing and communications. She specializes in reviewing personal loan and finance products to help readers navigate the complex world of personal finance.