In the world of lending money and borrowing money, there are a lot of terms thrown about, terms like APR, payment rate, term of the loan, due date, and also the usual figures such as how much you are borrowing, and how much in total you will pay back.
There are also some other terms used such as co-signer, guarantor and for some credit cards and revolving lines of credit, authorised user.
The Process of Lending Money
When a bank or loan company lends money, to them this loan is an investment. The investment comes as all investments do, with risk. Risk of losing money.
The lender charges an interest rate, and if you pay the loan back as agreed, the lender makes money off of the interest they charge on the money borrowed.
The lender or investor knows there is a risk with all loans, but they try to reduce that risk by checking the borrower out before granting the loan. This checking out process is called underwriting, and it involves:
- Checking you can afford to repay the loan.
- Reviewing your credit history and credit score to see how you have paid your accounts in the past.
- Looking at your debt to income ratios.
- Possibly asking for some form of security or collateral.
- Possibly asking for someone to be on the loan with you.
In asking for someone to be on the loan with you, this can come in two (2) forms, as a co-signer, or as a guarantor.
What is The Difference Between a Co-Signer and a Guarantor?
The quick answer here is, not much. There is little or no difference in reality.
When a lender looks to reduce their risk on the loan to you, which is an investment to them, they have the following options:
- Reject or deny the loan.
- Charge a higher interest rate so they can make more money.
- Shorten the term, instead a 2 year loan make it 18 months or less so they get their money back sooner.
- Ask for a larger deposit or some form of collateral.
- Reduce the loan amount, or credit limit on a credit card.
- Ask for a co-signer or guarantor.
In essence, co-signing for a loan or being a guarantor are the same. As a co-signer or guarantor you are just as liable for the loan as the borrower. Should the borrower fall into arrears, or default on the loan, the lender will look to you, as a co-signer or guarantor, to make the payments.
The lender asks for this second person to sign on the loan, to strengthen the loan, and make the lender’s investment more sound.
As a co-signer or guarantor, your credit can be affected by the loan, as can your ability to take out other loans on your own.
Why would a bank or lender require a co-signer or guarantor? Because in some ways the borrower is not a sound investment or there is an issue. That issue could be the borrower has no credit, poor credit, or something that the lender feels needs the extra help of a second party on the loan.
What About Authorised Users?
Authorised users on an account are a different kettle of fish.
Authorised users are usually on credit cards, and other revolving lines of credit. And they are just what the name implies, they are authorised by the borrower or person or company that has the account, to use the line of credit.
Authorised users have no liability or responsibility to repay the account. Their credit is not affected by the account. They get all the joys and fun of using the credit without the payments.
The borrower may expect the authorised user to pay towards the account and what they spend using it, but technically, they are not responsible.
As the main borrower and person responsible for the account, you may wish to monitor the account on a regular basis, and also be careful with who you allow to be an authorised user.
One last thing that needs to be said about co-signing for a loan, guaranteeing a loan, and even being or allowing someone to be an authorised user, all of these can affect relationships. It may be a close friend, family member, partner or spouse. When entering into financial agreements together, there is a huge element of trust, and should anything occur to break this trust, it is similar to infidelity.