You bet there is! And, it is exceedingly important that you understand and respect the differences.
The fundamental difference in the terms is determined by who gets the use of the loan proceeds in a loan transaction or use and ownership of the property purchased in an installment sales contract. If the “secondary obligor” is going to have the same ownership privilege in the loan proceeds or the property acquired as the “primary obligor,” then that second person is a co-maker—with all of the benefits and obligations of the primary obligor. Actually, the terms “primary” and “secondary” have no real difference in this context, as both parties are equally obligated on the debt.
A “cosigner” however, is someone who does not enjoy the use and ownership, but has signed his/her name on the obligation and is every bit as obligated for repayment of the debt as is the primary obligor. There are very specific disclosure obligations that must be given to the cosigner in connection with a consumer transaction. These obligations are derived from the Federal Trade Commission Credit Practices Rule. In fact, there is even a required notice form that must be used word-for-word in consumer, cosigner transactions.
A “guarantor” is in the nature of a cosigner, in that the guarantor does not have the use and enjoyment of the loan proceeds or the property purchased. At common law, absent language to the contrary in a note or contract, a guarantor is a guarantor of collection only. This means that a creditor may only pursue such a guarantor after unsuccessfully seeking collection from the primary obligor. Of course, lawyers have put language in contracts of guaranty that turn them into guaranties of payment rather than merely guaranties of collection. And, in so doing, the term “guarantor” and “cosigner” have really become synonymous. But note: a creditor does not escape the Credit Practices Rule by calling the secondary obligor a “guarantor” as opposed to a “cosigner.”
There are other consequences to the cosigner/co-maker distinction under the Equal Credit Opportunity Act and the Truth-in-Lending Act. That is, co-makers enjoy certain protections that cosigners may not.
Also, keep in mind that state laws may dictate other requirements of both cosigners and co-makers.
Practice Pointer: Take time now to review your note and contract forms to make certain that your documents accurately reflect the differences between cosigners and co-makers, with appropriate disclosures being a part.
