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When choosing accommodation, rent agreements usually have a cosigner or guarantor clause to increase the owner’s security and decrease the liability. The cosigner or guarantor is the second person signing the tenant’s contract. Although most people use these terms interchangeably, they have distinct meanings and imply different clauses. When signing a rental agreement, it is essential to understand the terms and ensure that you make the right choice. Continue reading our guide to guarantor vs cosigner to find out more!
Highlights On Guarantor Vs Cosigner
| Attributes | Cosigner | Guarantor |
| When financial responsibility begins | Immediately | Only when/if the primary borrower defaults |
| Credit impact | The loan appears on the credit report. | The loan will not appear on the credit report unless the borrower defaults. |
| Right to loan proceeds? | No | No |
| Access to loan information | They can request monthly statements at any time | No access to financial statements. |
What Is A Guarantor?
A guarantor practically “guarantees” the tenant’s responsibility and finances. When a guarantor signs a contract, they assume the tenant’s complete financial responsibility, meaning that if the tenant fails to pay the rent, the guarantor will. Despite that, the guarantor holds no tenancy rights over the property and cannot claim it in any way.
The major disadvantage of being a guarantor is that you shoulder entirely the financial burden of the borrower or primary signee. If the tenant fails to pay the instalment or rent, you must pay in their place. This might eventually become a colossal responsibility even for those with high credit. Of course, you get the advantage of helping a loved one with their finances.
In some cases, a guarantor can be a third-party company. In such cases, the lender or owner of the property may do a complete background check on the guarantor’s finances.
What Is A Cosigner?
A cosigner is someone who takes financial responsibility and also holds tenancy rights. This means that someone who has cosigned the rental agreement with you will be liable to pay the rent if you fail to do so, but they also have the legal right to stay with you. This implies that cosigners are more directly involved in the rental agreement than guarantors. One thing to remember is that a cosigner is legally obliged to pay a component of the rent, meaning that the lack of timely rent payments might reflect on both the primary signee and the cosigner’s credit score.
Similar to the guarantor, a cosigner faces more or less the same disadvantages. If the instalments aren’t paid, you, as the cosigner, will have to make the payments. If the rent is not processed, you’ll have to take the financial burden and ensure it reaches the owner’s account. Moreover, your credit score might fall and eventually increase your debt-to-income ratio. The only possible advantage you might have as the cosigner in a rental agreement is that you will be entitled to stay on the property.
Similar to guarantors, cosigners may also need to have their financial backgrounds checked by the lender or property owner.
Difference Between Cosigner And Guarantor
The major difference between a guarantor vs cosigner is that the former is only responsible for missed financial payments, whereas the latter is financially responsible and also holds the right to the property and can stay if needed.
Another significant difference between the guarantor vs cosigner is that the cosigner is responsible for each debt payment or every month’s rent. On the contrary, a guarantor is only financially responsible if the borrower fails to pay any instalments at all and falls into complete default. Keeping both these differences in mind, we can infer that a cosigner versus guarantor both provide the much-needed credit access the borrower or tenant needs. However, for either role, you must keep in mind that being a cosigner or guarantor means taking financial responsibility for the primary borrower.
Let’s now assess when you should get a guarantor vs cosigner depending on how it affects the rental agreements.
When Should You Get A Guarantor Vs Cosigner?
Let’s begin with the former in the argument of guarantor vs cosigner. If you don’t want to share your rental property or space with anyone but still need someone to back you up financially, you must get a guarantor. Specifically for international students, a guarantor is by and far the most preferable option as this helps you get your own space with the credit access you need.
If you want to move to a rental property or private housing option with a roommate, then a cosigner agreement might be preferable. A roommate will take over the responsibility as the cosigner by backing your credit. In return, you can do the same for them. However, note that in such an agreement, you will be responsible for the complete rent in case your roommate fails to pay their share.
There are several reasons an owner might ask you to get a guarantor or cosigner. Some of these are:
- Poor credit score
- No to less credit history
- First-time renter
- No steady income
- Monthly income less than three times the monthly rent
When getting a guarantor or a cosigner, don’t forget to ask them these questions:
- Is your credit score decent?
- Do you have solid financial standing?
- Are you willing to take this financial responsibility in a long-term scenario if the need arises?
- Will you be able to pay my rent if I fail to do so?
- Do you have a consistent source of income?
What Should You Keep In Mind While Becoming The Guarantor Or Cosigner?
Let’s flip the table for a bit. Assume that you are approached to sign a rental agreement as a guarantor or cosigner. What are the risks you should consider? First and foremost, as mentioned above, you will be 100% responsible for their financial liabilities. For instance, if they are unable to pay, you’ll have to.
Therefore, when signing as a guarantor or cosigner, it is essential to ensure that the person you’re signing for is financially responsible and won’t cause long-term issues for you. Ask them these questions to make sure you’re on the same page:
- How would you repay me if I had to pay your rent/instalments?
- If I were forced to pay rent for a long time because of an unavoidable financial strain, what would you do to tackle that financial situation?
- Are you in any previous debt?
What Are Third-Party Guarantors?
One of the standard requirements for a guarantor is that they must reside in the same country as you. As an international student, it might get tough to find someone living close to you who would be willing to take your responsibility. In such cases, you can hire a third-party rent guarantor. They offer services that provide a guarantee or insurance so the owner receives the rent in case the tenant cannot pay it.
What Happens If The Guarantor Or Cosigner Fails To Pay?
Getting ahead of the guarantor vs cosigner debate, let’s analyse the future possibilities. A guarantor or cosigner is supposed to pay for you if you fail to pay rent. But what happens if they themselves fail to pay? Here are some of the standard consequences for the guarantor or the cosigner:
- Permanent mark on the credit report
- Decrease in credit score
- Legal action for breach of contract
What If You Don’t Want A Guarantor Or A Cosigner?
It’s possible that you can’t find a guarantor or cosigner in the place you live. Or maybe you just don’t want to get one to increase financial liabilities or dependence on someone. In such a situation, you can pledge collateral if possible. You can get a roommate and co-apply for rental agreements. Ultimately, the decision lies with your needs and preferences.
FAQs
Q1. Is it better to have a guarantor or a cosigner?
Ans: If you need someone to be responsible for your payments and rent from day one, a cosigner is the better option. A guarantor only comes into the picture if you fail to pay the instalments or rent consistently.
Q2. What is the disadvantage of being a guarantor?
Ans: Owners of properties or lenders may occasionally run a complete financial check to ensure you have the required qualifications as a guarantor. Consistently being the guarantor can have a negative impact when accumulated debts for affordability are calculated.
Q3. Will being a guarantor affect my CIBIL score?
Ans: Being a guarantor can potentially affect your CIBIL score if the primary signee fails to pay the instalments or rent, and you are required to pay it in their place.
Thank you for reading our guide to guarantor vs cosigner! Which of the two do you think is a preferable option? Let us know in the comments section below!
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