When borrowing money, lenders often require additional parties—such as comakers, cosigners, or guarantors—to help secure repayment. While these roles may seem similar, they carry different legal and financial responsibilities. Comakers share equal responsibility for repaying a loan, while guarantors only step in if the borrower defaults. The distinction between these roles is crucial, as they can impact credit scores, legal obligations, and even tax consequences.
What is it?
Comakers are individually responsible for repayment of the same loan
When two or more people borrow money from the same lender under the same loan agreement, they are said to be comakers. Comakers sign the same loan document, and make the same promise to repay. Comakers are individually responsible for the entire debt, even if the other becomes unwilling or unable to repay. They are individually bound by all terms of the contract from the date of signing.
A guarantor only becomes responsible upon the borrower’s default
When a person borrows money from a lender and a third party guarantees repayment of that loan, the third party is called a guarantor. The guarantor does not sign the original loan document, is not a party to the original loan agreement, and is not bound by its terms. The guarantor signs a separate document called a guarantee. The guarantor becomes responsible for the debt only when he or she receives notice of the borrower’s default.
Usually, comakers are involved in a joint endeavor that requires funding
Typically, two or more people become comakers on a loan because they applied for the loan jointly. Comakers might be married couples, business partners, or any other group of persons borrowing money for a common purpose. Comakers typically share the benefits and burdens of the loan.
Usually, a guarantor is required by the lender as a condition of the loan
Typically, a borrower is asked to provide a guarantor for a loan whenever the lender wants additional protection. A lender may review a borrower’s loan application and decide that a guarantor is needed prior to loan approval because the borrower’s credit is questionable or because the loan amount is large. Alternatively, an existing loan might be in default, and the lender may agree to forbear from collection efforts if the borrower provides a guarantor for the loan. In either case, the borrower must find someone who can and will agree to compensate the lender for any losses resulting from the borrower’s failure to repay.
What happens if the borrower defaults?
Comakers are parties to the same agreement; all are bound by provisions of the loan agreement. If the action of any comaker results in a breach of the loan provisions, then all are in default. Loan activity is reported on each comaker’s credit report.
A guarantor is not a party to the original loan agreement. The guarantor signs a separate agreement. If the borrower fails to comply with provisions of the loan agreement, only the borrower is in default. The guarantor’s obligations are not triggered until the guarantor is notified of the borrower’s default. Loan activity will not be reported on the guarantor’s credit report. However, failure to honor the terms of the guarantee agreement would be reported.
Are there any tax implications?
Under the tax laws, if a lender forgives a portion of a loan, the amount forgiven is generally deemed income for tax purposes. Comakers generally must report their share of the loan forgiveness on their tax returns. However, a guarantor is not primarily responsible for the loan. Accordingly, forgiveness of the original loan is not income to the guarantor for tax purposes.
Scarlet Oak Financial Services can be reached at 800.871.1219 or contact us here. Click here to sign up for our weekly newsletter with the latest economic news.
Source:
Broadridge Investor Communication Solutions, Inc. prepared this material for use by Scarlet Oak Financial Services.
Broadridge Investor Communication Solutions, Inc. does not provide investment, tax, legal, or retirement advice or recommendations. The information presented here is not specific to any individual’s personal circumstances. To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on individual circumstances. Scarlet Oak Financial Services provide these materials for general information and educational purposes based upon publicly available information from sources believed to be reliable — we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.
