Differences Between a Guaranty Agreement and a Co-Signer?

A guaranty agreement is a contract signed by a guaranteer who promises to pay for a loan or debt in the event that the original debtor defaults.

What is a Guaranty Agreement for?

For example, when a recent graduate is going to purchase a car, she or he may not have an eligible credit score for the auto loan. The recent graduate may choose to ask a parent to be a guaranteer to get approved for the auto loan. In this case, the debtor would be the recent graduate, the creditor would be the bank, and the guaranteer would be the parent. If the recent graduate defaults on the loan, then the parent would be liable for the debt.

What is the Difference Between a Guaranty Agreement and a Co-Signer?

In a guaranty agreement, the guaranteer is responsible for the debt only if the debtor defaults. This means that any potential default by the debtor will not appear on the guaranteer’s credit report (unless of course the guaranteer defaults).

Since the guaranty agreement is not necessarily between the debtor and the guaranteer, the guaranteer typically doesn’t have ownership rights when the loan has been paid off. For example, if the recent graduate above were to make all the car payments on time, then the parent would not be entitled to be on the title. However, if the recent graduate defaults, the parent may have an ownership claim on the vehicle given that the parent pays it off.

A co-signer is an additional party in the original loan agreement and is equally responsible for the loan payments. When the loan is paid off, both parties have equal ownership rights. In the example of the vehicle, if the recent graduate’s parent chose to co-sign the loan instead of signing a guaranty agreement, the car would be in both the graduate’s name and the parent’s name – even if the recent graduate made all the payments.

Determining whether being a guaranteer or a co-signer is best depends upon the situation. If you have decided that a guaranty agreement is right for you, start by filling out this free downloadable template. It will walk you through completing a guaranty agreement step-by-step.