In some instances when we apply for a loan, the lender may feel we can afford the loan, but they want some other insurances to protect their investment, which their investment is the loan.
There are ways lenders can try to limit their risk on a loan, especially if the borrower may have had bad credit in the past.
A lender can:
* Reduce the amount they will lend, or in the instance of a credit card, offer only a low credit limit initially
* Lenders can reduce the term of a loan, from say 48 months (4 years), to 24 months (2 years). This allows them to get their money back at a quicker rate.
* Request a larger deposit, such as with car loans and mortgage loans for properties.
* Condition the loan requesting a co-signer or a guarantor.
There may be other condition for a loan as well, but requesting a co-signer or guarantor are the most popular.
Guarantors can also be used in situations outside of borrowing and loans, a landlord may request a prospective tenant have a guarantor on the tenancy agreement.
As we will see, co-signing and guaranteeing a loan are very similar, however, there are some subtle differences. And being an authorised user on an account, is a whole different matter.
Being a guarantor on a loan is in essence saying, if the borrower fails to pay the payments on the loan, I will pay the payments. This may be for a short time until the borrower can afford to repay the loan again, or it may be for the remaining term of the loan.
In order to be a guarantor for a loan, you must know the borrower, they can be a friend, family member, colleague, just someone you know well.
A guarantor is like a “secondary form of repayment” to a lender. The only time a gurantor becomes liable for the loan payments, is if the borrower fails to pay them.
Guarantors are used a lot for business loans. Unless a company has a proven track record of success and profits, the bank or lender will ask one of Directors to sign as guarantor.
As a guarantor the loan you are guaranteeing does not affect your credit unless:
* The borrower defaults and you fail to repay the loan.
* If when you apply for credit, that lender holds the loan as an obligation against you.
Co-signing for a loan is similar to guaranteeing the loan, but has some minor differences, one being as a co-signer you are just as responsible for the loan as the borrower. If the borrower fails to pay, then you are expected to pay.
The difference is that in co-signing it can be a couple together signing for the loan, usually residing together. This doesn’t mean a friend or family member cannot be a co-signer, but in some instances it is people residing in the same household.
In addition, a loan may be conditioned or require a co-signer for affordability. Both parties income are needed to qualify for the loan, such as in a mortgage loan.
Both incomes may be needed to get the loan, where as in a guarantor loan, only the borrower’s income is used for an affordability test, the guarantor is just there if the borrower defaults.
Look at co-signing as the borrower is not financially strong enough for the loan, so they need a co-signer.
Being an authorised user on an account is very different than being a co-signer or guarantor.
Authorised users are usually associated with credit cards, but they can be for other banking situations.
As an authorised user you have full use of the credit card or the account. You can make purchases and use the card the same as the person whose name is on the account.
You are an authorised user, not the account holder. As such, you are not responsible for the account, or the payments.
Authorised users have no liability for the account.
Technically an authorised user could use a credit card to its maximum credit limit, and not be responsible for payments.
This is why allowing someone to be an authorised user on account you are responsible for, must be taken seriously and thought through.