What is the Difference between co-Borrower & Guarantoradmin
You want to take a loan, but the bank believes that your income is not enough, and offers to attract a co-borrower or guarantor . Or vice versa: you are asked to become a co-borrower or to vouch for someone else’s loan. We understand what the differences are and what you risk by agreeing to a particular role.
What is the difference between the co-borrower and the surety?
The co-borrower is the same borrower. He has the same rights and obligations as if he himself took a loan. Even when you are persuaded to sign the agreement “just for show” and you will not use credit money, you have a great responsibility. If the main borrower for some reason cannot pay the loan on time, the co-borrower will have to pay the money.
The guarantor warrants for the borrower – it guarantees the bank that the loan will be repaid within the agreed period. The surety is not obliged to follow the schedule of payments of the borrower. If he is late with payment for a couple of days, the guarantor is in no danger. But if the delay is serious, the bank will present claims to the guarantor – and then the debt will be reflected in its credit history.
For large loans, co-borrowers and guarantors can be involved at the same time. If the borrower stops paying, the co-borrower will have to repay the debt. If he also does not make payments, then the guarantor will have to pay.
Let us consider in more detail how the requirements for co-borrowers and guarantors, their capabilities and responsibilities differ.
What documents do I need to provide?
Typically, the co-borrower must provide the bank with the same set of documents as the borrower: passport, National ID Card, marriage certificate, income certificate a certified copy of the work book. Each bank can have its own set of documents.
Sometimes the list of documents for the borrower and co-borrower may vary. For example, under the family mortgage program, the main borrower must provide birth certificates for the children, and the co-borrower does not need to do this.
The guarantor in most cases must provide only a passport, income statement and a certified copy of the employment record.
The co-borrower signs a loan agreement with the borrower, but the guarantor does not. With it, the bank enters into a separate guarantee agreement.
If the loan agreement provides for compulsory insurance, the co-borrower will also have to sign the insurance agreement. This is usually not required from the guarantor.
Is it possible with the help of guarantors and co-borrowers to change the size of the loan and the interest rate?
The financial position and credit history of the co-borrower directly affect the terms of the loan. The Bank checks the co-borrower as well as the borrower: place and length of service, income, financial discipline. The loan amount, interest and the period for which it is issued may depend on the results of the audit.
As a rule, the higher the income of the co-borrower, the greater the amount the bank is willing to lend. If the financial position of the co-borrower inspires confidence in the bank, this may lower the interest on the loan.
But the income and credit history of the guarantor almost never affect the parameters of the loan. Most often, the bank simply reports whether such a surety is suitable for it or not.
Does the debt of the borrower affect the credit history of the co-borrower and guarantor?
In the credit history of the co-borrower appears complete information on the loan of the main borrower, including the payment history. Moreover, the outstanding part of the loan is considered the debt of the co-borrower. If he wants to take a loan for himself, financial institutions will calculate the size of a new loan taking into account this debt.
The borrower’s credit history does not reflect borrowed money or a loan. But only while the borrower regularly makes payments. If the borrower ceases to repay the loan, then the obligations pass to the guarantor – and the debt appears in his credit history.
Does the co-borrower and guarantor have the right to property purchased on credit?
By default, neither the co-borrower, nor the surety do not become owners of property purchased with credit money. They acquire ownership of the apartment, car or other item only if they, together with the borrower, appear as buyers in the contract of sale.
Automatically, only spouses become owners. For example, when they take a mortgage, the acquired housing is considered their jointly acquired property, unless a marriage contract has been concluded with other conditions.
In other cases, the co-borrower and the guarantor may conclude an agreement on mutual obligations with the main borrower. In such an agreement, it can be prescribed that the co-borrower (surety) will become the owner of the property for the purchase of which a loan or loan was issued if he is forced to pay a debt instead of the borrower.
In addition, if the borrower and the co-borrower initially intend to pay the loan equally, they can immediately draw up equal ownership of the property.
What loan information is available to the co-borrower and guarantor?
The co-borrower has the right to receive a payment schedule, information on the amount of current debt, as well as data on payments already made.
The loan agreement states how the bank provides this information to the co-borrower. As a rule, detailed information about the loan is available in the mobile application and the personal account of the co-borrower on the bank’s website.
The guarantor is not obliged to tell the bank about the amount of outstanding debt, payments made or upcoming payments, while the borrower makes the money on schedule. The bank begins to inform the guarantor only if the borrower ceases to pay and the responsibility for paying off the debt passes to the guarantor. However, some banks include the right of a surety to access this information in a surety agreement, a loan agreement or banking rules.
Is the liability for late payments the same?
If the main borrower does not make payments on time, then the obligation to pay off the debt in any case passes to the co-borrower or guarantor. But with different speeds and different consequences.
The co-borrower can immediately find out that the payment is past due. This information is easily verified through an online bank or mobile application. Within 7 days, the bank will additionally send him an SMS message, a push notification or an e-mail about it – a specific method is prescribed in the loan agreement.
Information about the delay is reflected in the credit history of the co-borrower. Therefore, it is in his interest to immediately make another payment on the loan, otherwise in the future it will be more difficult for him to get a loan.
The surety does not always know about delays immediately. Usually, only after the bank has presented him with a request to make another payment for the borrower and pay a late fee. As a rule, the contract of guarantee establishes the period during which the surety must transfer the money. The countdown starts from the moment when he receives a bank request.
If the surety fulfills this requirement within the time frames established by the bank, the borrower’s delay in its credit history will not be affected. But if he doesn’t deposit the money on time, it will already be considered his own delay – and it will ruin his credit image. In addition, fines are usually specified in the surety agreement – in case the surety does not pay the money on time.
If the co-borrower or guarantor does not begin to repay the debt of the borrower voluntarily, the bank may go to court.
If the loan is not repaid after a court decision, the bailiffs are entitled to seize the accounts and deposits of the co-borrower or guarantor. In cases where there is not enough money to pay off the debt, the bailiffs can hammer out the property of the co-borrower or guarantor to repay the debt to the bank.
Is it possible to change the terms of the contract?
The co-borrower may change the terms of the loan agreement, but only with the consent of the main borrower. For example, he may apply to the bank with a request to increase the loan term and reduce monthly payments – to restructure the loan. Or, conversely, early repay it .
In the case of a mortgage, the co-borrower can arrange a mortgage vacation if he is in a difficult life situation. But when the bank decides whether the case is suitable for the conditions of the holidays, it will evaluate the total average monthly income of the borrower and co-borrower.
The main risk of the main borrower is that without the consent of the co-borrower, he is not entitled to change the terms of the contract. For example, if the co-borrower does not provide data on his income or is categorically against the extension of the loan term, the borrower will not be able to extend payments.
The guarantor does not sign a loan agreement and cannot influence its terms. But if the borrower, for example, increases the size of the loan, this will not affect the obligations of the guarantor, unless he gives his consent and signs a new surety agreement.
If the surety takes over the payment of the debt (voluntarily or by court order), he will be able to negotiate its terms with the bank. Perhaps the bank will agree to a loan restructuring.
Is it possible to split the loan and pay only part of the debt?
What is the difference between co-borrower and guarantor
Theoretically, this is possible. Guarantors in this regard are simpler – they can initially spell out suretyships in the contract, which only reserve responsibility for part of the debt.
Co-borrowers may try to negotiate with the bank so that it shares a loan between them. But banks are reluctant to do so. It is important for the lender that all credit be repaid. And he doesn’t care who does it. The more defendants, the higher the chances of repaying the full amount of the debt.
Most often, soft loans cannot be divided into several, as they are issued on special conditions and individually, borrowers will no longer correspond to them.
For example, under the family mortgage program, preferential loans can be given to families in which a second or subsequent child was born. Such a loan, the bank will not divide in half between mom and dad – simply because the collateral for a mortgage loan is one housing and it is impossible to divide it.
The terms of the loan can be changed by court order, then the consent of the bank is not required . But the court rarely makes such decisions. For example, the divorce of the co-borrowing spouses will not be a sufficient reason for the court to change the terms of their loan agreement.
At the same time, both the guarantor and the co-borrower have the right to demand that the borrower reimburse them for the payment of debt in full or in part. If you can’t reach an agreement peacefully, you can go to court.
If I take out a loan, who should I borrow — borrowers or guarantors?
It is more profitable for a borrower to attract a co-borrower than a guarantor. Indeed, if the co-borrower has a good and stable income, there is a chance to get a loan on more favorable terms.
But keep in mind: you will have to coordinate all important credit decisions with your co-borrower. And if he is against, for example, mortgage vacations – most likely, you will not be able to take them. Therefore, it is better to take close relatives with whom you have a common budget and financial interests, or complaisant friends with whom you can easily agree as co-borrowers.
If I am asked to become a co-borrower or guarantor, what status is better to choose?
To begin with, it is generally worthwhile to understand whether you are ready to take responsibility for someone else’s debt.
In the case of family members – spouses, parents, children – especially if you have a common budget, it makes sense to act as a co-sponsor. Then the conditions for a loan or a loan may become more profitable.
When someone asks you not to be so close, but you are determined to help, the status of the guarantor is safer. Even if a friend will occasionally be a little late with payments, this will not spoil your personal credit history and someone else’s debt will not prevent you from taking your own credit.
If you do not want to refuse, but the amount of possible debt scares you, you can become a guarantor only for a loan. For example, half or a third of the debt. In this case, the borrower will have to find other guarantors who will also take responsibility for the rest of the debt. Not all banks agree to share loan responsibility between several guarantors, but finding a more compliant bank is already a borrower’s problem.
With each guarantor, the bank will conclude a separate agreement. If suddenly the borrower stops paying, you will be obliged to reimburse the lender only your share of the outstanding debt.