Answer by Dennis Deischer: Basically the difference relates to liability. A cosigner signs the debt and is contractually liable without the bank needing to take any specific action to request payment from a cosigner. A guarantor, on the other hand, does not sign the debt obligation, and to become liable for the debt, the bank must exhaust all other means of collection from the original borrowers.
Answer by Lucy Griffin: Several regulations, such as Regulation B (Equal Credit Opportunity) and Regulation AA (Credit Practices) use terminology relating to cosigners and guarantors. The key difference is liability. However, for purposes of Regulation B, the definitions exist to determine whether the regulation's protections apply. Reg B makes it clear that the signature protections apply to guarantors as well as to the primary borrower. Cosigners are also protected.
The credit practices rule makes a tighter distinction. For purposes of the credit practices rule, the co-signer is someone who will become liable on a consumer debt without receiving the benefit of the loan proceeds. This rule (written by the Federal Trade Commission) defines the term co-signer to mean what a lender would usually call a guarantor. This co-signer usually occurs in car loans or similar loans to purchase consumer goods when the co-signer will not be an owner or user of the goods being purchased. The rule does not apply to real estate or to business loans.
Then, of course, the terms may also be defined by state law.
First published on BankersOnline.com 8/6/01