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.
Caution: There are differing views, even among well-respected authorities, regarding whether a cosigner is the same as a comaker, the same as a guarantor, or some combination of the two. If you are being asked to cosign a loan, you may want to clarify whether you are agreeing to be a party to the entire contract (comaker), a guarantor of the underlying debt (guarantor), or both.
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.
Example(s): Tyler wants to buy a car and applies to the National Bank for a loan. Tyler is only 18 years old and has not established credit yet. The loan officer tells Tyler he can have the loan if he can find a guarantor. Andy, Tyler's dad, agrees to guarantee Tyler's loan. The loan officer extends the loan, assured that if Tyler falls behind on the payments, his father is liable for the debt.
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.
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