When signing a lease, a guarantor or cosigner may be required as part of entering a financial agreement. This is a common request and is typically required of borrowers with less-than-ideal credit or finances. The difference between a guarantor and a cosigner typically lies in the level of responsibility required of each. Essentially, both options can be used to help mitigate risk to the lessor, so that in the event of default it can recoup its losses from the assigned guarantor or cosigner.
What Is a Guarantor?
Guarantors are used when a borrower’s credentials aren’t considered strong enough to sign a lease on their own. Essentially, the guarantor pledges collateral and acts as a fail-safe if a borrower falls through on their payments and is in default of the lease agreement.
While not as liable as a cosigner, a guarantor can vouch for the lease applicant and provide a sense of security to the lessor that there is another point of contact to ensure lease obligations are met. Meaning, a guarantor’s responsibilities are only enacted if and when the borrower is in default of the agreement.
In terms of impact to the guarantor, there is generally less risk involved. That said, most guarantors need to have excellent credit and financial history to be eligible. Should the borrower need to fall back on the guarantor, it will become their responsibility and they will usually be approached by the lessor before any legal action is taken.
Example of Using a Guarantor
As an example, let’s say a business is looking to obtain a piece of equipment for its business operations. It wants to utilize equipment financing to acquire the asset, however, the lender is requesting a guarantor to help secure the financing request. The borrower and its applicable guarantor sign the lease agreement, and the borrower is solely responsible for the monthly payment due.
A few months later, the borrower is struggling financially due to unforeseen business expenses and is unable to meet the lease repayment obligations. After missing three months worth of scheduled payments, the borrower is considered to be in violation of the lease agreement and is officially in default. The lender then turns to the guarantor and demands the three months worth of payment to recoup its losses.
Pros and Cons of Using a Guarantor
| PROS | CONS |
|---|---|
| Can help the borrower secure new financing opportunities | Can strain personal relationships due to financial involvement |
| Most of the risk is tied to the borrower in the event of default | Can damage credit history of both the borrower and guarantor |
| Can provide more favorable rates and terms when negotiating a lease agreement | May complicate the application process when gathering financial documentation and signatures |
What Is a Cosigner?
Cosigners have similar obligations as guarantors, however they carry a bit more responsibility. What this means is that they typically are the first point of contact the second a payment or other obligation of the lease agreement is missed. Usually, their credit is tied to the lease alongside the primary borrower, in which case both parties are liable for payment and any legal repercussions. It also means that both parties are taking on debt, whereas guarantors do not.
That said, it’s important to note that while cosigners have equal responsibility in an agreement, the arrangement between cosigners and primary borrowers can vary in that the primary borrower can choose to make all payments, and only include the cosigner when necessary. The relationship can be structured in a variety of ways depending on the needs of the borrower.
Example of Using a Cosigner
Similar to the prior example, let’s say we have a scenario where a business wants to enter into an equipment lease agreement but needs to strengthen its application credentials to be considered eligible. It brings on a cosigner with strong credit and financials to obtain approval.
The borrower and cosigner have an arrangement where the primary borrower is responsible for all obligations outlined in the lease. However, the borrower is accidentally late on a payment one month, which transfers repayment responsibility immediately to the cosigner before the borrower is considered to be in violation of the lease agreement and before it’s considered to be in default.
Pros and Cons of Using a Cosigner
| PROS | CONS |
|---|---|
| May be offered better rates and terms in comparison to applying as a single applicant | May increase the debt-to-income ratio of both the borrower and cosigner |
| Can help to improve the credit history of the primary borrower | Financial responsibility immediately falls to the cosigner in the event of a missed payment or obligation |
| May allow for further financing opportunities for the borrower | Can impact both parties' credit history and ability to secure further financing in the event of default |
When to Choose a Guarantor vs a Cosigner
It’s not always a given that you’ll have the opportunity to choose between a guarantor or cosigner, as this may come down to the preference of the lessor. However, if given the option to choose, or you’re looking for financing specific to one or the other, then you should consider the key differences between the two before signing an agreement. Consider the following:
You should choose a guarantor if:
- You’re not able to get approved as a solo applicant, and need additional financial resources to qualify.
- You don’t have collateral to offer or need an outside resource to vouch for your ability to make payments on time.
- You need financing but want to be the primary borrower and not share lease responsibilities with another individual.
Legal and Financial Considerations
There are legal and financial considerations to take into account when determining whether to use a guarantor or cosigner. Generally speaking, there are a few factors that can impact both the borrower and the supporting party. This includes:
- Credit score: The credit score of all parties involved can be impacted negatively in the event the borrower defaults on the lease agreement.
- Debt-to-income ratio: Specific to borrowers and cosigners, applying for financing can impact the debt-to-income ratio of both parties, which may make getting further financing more difficult due to an increase in monthly debt payments.
- Collateral liability: In some cases, collateral can be seized if offered as part of the lease agreement. This may be applicable to both the borrower and guarantor or cosigner depending on the terms of the agreement.
- Lender action: Depending on the agreement, the lender or lessor can take action against all parties involved in the event of default. Whether it enacts immediate repayment from a guarantor or collects multiple missed payments from a guarantor, the lender has the ability to demand payment in accordance with the terms of the lease agreement. If payment isn’t made, then the lender may take legal action to sue.
Frequently Asked Questions (FAQs)
Yes. This is true of both guarantors and cosigners, however, cosigners are generally more at risk. In the event of default, both options are liable in some capacity to fulfill the debt obligations of a lease agreement, which can impact their credit and financial standing.
Both are good options depending on the financial situation, and some lenders may have a preference for which option to use. That said, a guarantor may be more suitable for borrowers looking to sign a lease and simply need more collateral support, and a cosigner may be better suited for borrowers who are comfortable with sharing co-ownership responsibilities.
Yes. It depends on your qualifications and the criteria set by the lender, but generally, you can try to get financing without the help of either a guarantor or a cosigner. In this case, you should try to find lenders that work with bad credit or businesses with limited history or resources. Keep in mind that these types of lenders tend to charge higher rates and fees to offset the risk of issuing financing.
Bottom Line
Both a guarantor and a cosigner can offer assistance when obtaining financing for borrowers who don’t have the financial strength to sign a lease on their own. While similar, the differences between a guarantor and a cosigner have varying expectations of responsibility in the event of default and are considered to be a serious financial commitment. Whereas some lenders may request either as part of issuing an agreement, it’s important to consider the implications for both the borrower and the potential guarantor or cosigner before committing to a lease.
