Cosigner vs Guarantor: What’s the Difference?

If you have a less favorable credit score or limited credit history, using a cosigner or a guarantor with strong credit may help you qualify for a loan or receive a higher loan amount or lower interest rate. Both a cosigner and a guarantor agree to cover a debt if the borrower can’t repay it, but their roles work differently.¹

Let’s dive deeper into how cosigners and guarantors may help you qualify for a loan and what you need to know about each role.

What is a cosigner?

A cosigner is a person who is equally responsible for repaying a loan with the primary borrower. You can ask anyone you know and trust to be a cosigner, but many lenders—including OneMain—have specific requirements, and some lenders don’t allow them at all.²

Typically, if a cosigner is needed, the cosigner should have a stronger credit score and/or a higher income than the primary borrower, which may give the lender more confidence that the loan will be repaid.

Common situations

A cosigner may be needed if you’re not sure you’ll qualify for a loan by yourself — potentially because you have a lower income or a less favorable credit score. In some cases, a lender may permit you to use a cosigner after you’ve already applied for a loan and the lender has determined you don’t qualify on your own.³

Lenders may allow you to use a cosigner on many types of loans,⁴ including:

• Personal loans
• Auto loans
• Mortgages
• Student loans

Responsibilities

If the primary borrower misses payments, the cosigner is equally responsible for repaying each missed payment. The shared responsibility for payments is called “joint and several liability.”

It’s important for the primary borrower and cosigner to have an honest conversation about how this arrangement could affect their relationship. A cosigner must feel confident that the borrower will make on-time payments — or be ready to step in and make those payments if they don’t.

Credit score impact

If the primary borrower misses payments, their credit score will be affected, and it will impact the cosigner’s credit score, too. On the other hand, if the primary borrower makes their payments on time, every time, it can help both parties’ credit scores.⁵

What is a guarantor?

A guarantor legally agrees to repay the primary borrower’s debt if they default, which means they’ve missed payments for a certain amount of time according to their loan agreement.⁶ The guarantor gets involved in the case of default, not if the borrower misses an individual payment.

Common situations

Guarantors are typically used when the lender or borrower believes there is a higher likelihood of a borrower defaulting on a loan.⁷ Like a cosigner, a guarantor is typically a trusted party with a stronger credit score or higher income than the borrower (or both). Criteria for those who can be a guarantor may also vary by lender.

In general, guarantors are less widely used than cosigners, and many lenders don’t allow them. Some types of loans for which guarantors may be more common include:

• Commercial real estate loans⁸
• Small business loans⁹
• Some mortgages, like government-backed home loans¹⁰

Responsibilities

While a cosigner is responsible for each payment the borrower misses, a guarantor is only responsible if the primary borrower defaults. The guarantor is then responsible for the entire loan.⁵

Credit score impact

If the borrower defaults on the loan, it will have a negative impact on their credit score as well as the guarantor’s. Individual missed or late payments, however, only impact the primary borrower’s credit score.⁶

Cosigner vs. guarantor

Here are a few key differences between cosigners and guarantors:

	Cosigner	Guarantor
Responsibility	Responsible for any loan payments the primary borrower misses, and responsible for repaying the entire loan if the primary borrower defaults	Responsible for repaying the entire loan if the primary borrower defaults
Commonly used	For borrowers with no credit score, low credit score or low income	For borrowers deemed at high risk of default
Prevalence	More common	Less common
Common loan types	Personal loans, auto loans, mortgages, some private student loans	Commercial real estate loans, small business loans, government-backed mortgages
Credit score impact to the cosigner/guarantor	When primary borrower misses payments	When primary borrower defaults

What to do if you don’t have a cosigner or guarantor

You don’t necessarily need to use a cosigner or guarantor to qualify for a loan for the amount and terms you need.

Consider using collateral or equity

A cosigner or guarantor may boost your borrowing power, but so can collateral or home equity. Collateral is an item of value that you possess, such as a car, that is used to provide the lender with security for a loan. Home equity is the difference between what you owe on your mortgage and the current value of your home. Let’s take a look at some ways you might borrow using collateral or home equity.

Secured personal loan

A secured personal loan allows you to borrow a lump sum of money, which you back with collateral, and repay in fixed monthly payments over a set period of time. With a secured loan, you may be able to qualify for a higher loan amount or a lower interest rate than you would with an unsecured loan, which doesn’t require collateral.

OneMain offers secured personal loans that use an eligible vehicle as collateral. With a fixed interest rate and predictable payments, you’ll know exactly what you’ll pay each month and when the loan will be completely paid off.

Home equity loan or home equity line of credit (HELOC)

If you’ve been making mortgage payments for several years, you likely have equity in your home. A home equity loan allows you to borrow money against that equity. You receive an upfront lump sum that you repay with interest over a set period of time. Typically, your home serves as collateral, meaning the lender may foreclose on it if you fail to repay the loan.

A HELOC is a line of credit that allows you to borrow money against the equity of your home. A HELOC is also secured by your home, but it works a bit differently than a home equity loan. Rather than receiving a set lump sum, you’ll receive a line of credit that you can draw from as needed, up to the credit limit, over a period of time known as the draw period. The draw period usually lasts between 10 and 15 years, during which time you can access the money via a bank card, online transfer or paper checks while you make monthly minimum payments.¹¹ Then, there’s a repayment period (usually 10 or 20 years) during which you must repay the rest of what you borrowed, plus interest.¹²

Both options use your home as collateral, which will often keep you from needing a cosigner or guarantor, but put the property at risk of foreclosure.

Consider other loan options

There are a couple of ways to borrow money that may be well suited to borrowers with limited credit history or a lower credit score or income. Even if you don’t have a cosigner or guarantor, these loans could be an option for you.

Credit-builder loan

A credit-builder loan is a type of personal loan designed to help you improve your credit score that generally does not require a cosigner or guarantor. A credit-builder loan works like a traditional loan in reverse. Rather than getting money first and repaying it over time, the lender holds the loan amount in a secured account while you make payments. Once you’ve made all the payments, you’ll receive the full loan amount.¹³

A credit-builder loan can be easier to qualify for than a traditional loan because the lender doesn’t pay anything upfront. Instead, you work to receive the loan amount by making on-time payments. The lender reports your payment activity to at least one of the three major credit bureaus (Equifax, Experian and TransUnion), which can help build your credit score if you make payments according to the terms of your agreement.

A credit-builder loan is a way to use a personal loan to build credit, which could help you get approved for future financing without a cosigner or guarantor.

Loan from friends or family

Finally, you might instead consider getting a loan directly from a close friend or family member. A family loan can bypass a credit check, high interest rates and the risk of directly hurting anyone’s credit score.

When asking a friend or family member for a loan, it’s important to be upfront and honest about your financial situation and create a repayment plan that works for both of you. It’s also a good idea to put the agreement into writing. You may risk harming your relationship if you don’t repay the loan.

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Make a wise call before you sign

Remember that being a cosigner or a guarantor is a serious financial commitment. Understand the risks before you ask someone to cosign or guarantee a loan. With their support and a plan to repay your loan on time, you could get the funds you need with terms that work for you.

Sources

1,5 https://www.equifax.com/personal/education/loans/articles/-/learn/cosigner-vs-guarantor/
2 https://www.bankrate.com/loans/personal-loans/im-a-loan-co-signer-what-are-my-rights
3 https://www.experian.com/blogs/ask-experian/can-you-get-a-personal-loan-with-a-cosigner/
4 https://consumer.ftc.gov/node/78337#what-kinds
6 https://www.investopedia.com/terms/d/default2.asp
7 http://investopedia.com/terms/g/guarantor.asp
8 https://mnbars.org/?pg=BenchBarofMinnesota&pubAction=viewIssue&pubIssueID=57232&pubIssueItemID=367831
9 https://mainshares.com/learn/understanding-personal-guarantees-in-business-lending
10 https://www.bankrate.com/mortgages/guaranteed-loan/
11 https://www.rocketmortgage.com/learn/how-much-heloc-can-i-get
12 https://www.consumerfinance.gov/ask-cfpb/what-is-a-home-equity-line-of-credit-heloc-en-107/
13 https://www.nerdwallet.com/article/loans/personal-loans/what-is-credit-builder-loan