Difference between Co-signer, Guarantor & Authorised User

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What is the difference between a Co-signer, Guarantor and Authorised User?

In this article we will attempt to answer some common questions regarding your responsibilities if you have either co-signed and loan agreement, or maybe you have decided to be a loan guarantor for someone.

We will cover the following subjects:

  1. Am I liable for a debt I co-signed on?
  2. Who can co-sign for a loan?
  3. What happens if someone I co-signed a loan for doesn’t pay?
  4. What is a guarantor?
  5. Why do I need to guarantee a loan or debt?
  6. Does it affect my credit if I guarantee or co-sign for a loan?
  7. What is an authorised user on a credit card?

There are a lot of similarities between a being a guarantor of a loan, a co-signer on a loan and an authorised user.

Any time you apply for credit whether it is a credit card, short-term loan, personal loan, guarantor loan, car loan or a mortgage the lender will look at your credit history to see how you have fared in the past with any loans you have had along with your ability to repay the loan.

Every lender had different criteria. One lender may lend you £1000 whereas another would be prepared to lend you £5000. It all depends on the lender criteria, these criteria maybe how long you have been in your current employment, your age, how much you earn, what your outgoings happen to be or the length of the loan period,

There are many types of loans for instance a short-term loan will be underwritten differently to say a car loan and most definitely different to how a mortgage would be underwritten.

For instance a credit card is a type of loan which is generally paid back at the end of the month, a credit card is called an unsecured loan since there is no security backing up the credit, whereas a mortgage is a secured loan as there will normally be some form of asset called collateral which will be forfeited to the lender if the borrower defaults on the loan payments and therefore a mortgage lent against collateral is a lower risk than an unsecured loan.

Lenders will always try to minimise their risk by limited the amount of money you can initially borrow from them if you are a new customer. Hence why some short-term loan direct lenders will have a ceiling on how much new customers initially may borrow.

Other than a ceiling on the amount of credit which a lender will allow you to borrow they may also reduce the period of time you may borrow the money for.

Other actions the lender can take to limit their risks are:

Setting a low credit limit on your card when you first apply. Over time they may rise it as you prove that you are able to manage your finances.

  1. Reduce the loan period
  2. Require a bigger percentage as a deposit for mortgages.
  3. Refuse the loan application.
  4. Request an asset with which to secure against the loan
  5. Request a someone to co-sign the loan
  6. Request someone to be your guarantor

The last two points we will look at next. As stated above there are a lot of similarities between a co-signer and a guarantor.

What is a Co-Signer

When a lender believe that they do want to lend you but you qualify as a border line rick they may ask if there is anyone you know who would co-sign the loan for you.

It maybe due to you having a poor credit history, or even no credit history at all since you have never taken out any credit in the past hence the name credit history. They will ask for some one to co-sign the loan so that they can reduce their risk when lending the money.

A co-signer can be anyone you know who you can ask and trusts you enough that they are willing to co-sign the loan agreement.

The co-signer has to trust you to repay the loan as if you don’t then they will be liable to repay the loan. A co-signer is as responsible for the loan as the you are.

So, if you decide one day to just take off into the wilderness the co-signer will have to pay the loan back. The co-signer will have to ensure that they understand the implications before they sign the loan agreement.

If you do not repay the loan it will be reflected on your credit score and will also affect the credit score of the co-signer.

Think long and hard about having someone co-sign a loan agreement or to be the person who co-signs the loan. You could be putting more than just money at risk. If it is a family member or a friend you could be about to make the Christmas dinner and awkward affair if it all goes wrong and all you get out of it is the risk of having to repay and also risking your credit score.

What is a Guarantor

Being a guarantor or a co-signer are very similar. In the same way that a co-signer of a loan is liable to repay the loan if the original borrower is unable to a guarantor is also liable to repay the loan.

The big difference here is that a guarantor is sometimes expected to put up some form of collateral like a car or property. Guarantor loans are helpful for people with poor or no credit history.

An example of a guarantor is when someone rents a house or flat that the landlord will require a guarantor who will pay the rent if the tenant is unable to. This is quite common for student lets.

Another example is when a new company is started, and the company goes to the bank to apply for a loan the bank may ask the directors to guarantee the loan. Therefore, if the company goes under the bank can turn the directors to repay the loan

As you can tell here that the lender will always attempt to reduce their risk.

The big difference here with guaranteeing the loan is that if the borrower default the lender will go straight to the guarantor for payment and the borrower is out of the picture.

Responsibilities which come with being a guarantor:

* You are responsible for the loan if the borrower misses a repayment or does not pay the loan at all

* Will affect your credit if you do not pay

Before you sign on the dotted line you will need to consider the following points. Being a co-signer should not be taken lightly, because you are going to have to repay the loan. All you are receiving from the deal is financial risk and risking your credit rating along with friction between you and the borrower.

You have to ask yourself why the lender requires a co-signer or guarantor, if it is because the borrower has bad credit history. If they do, you have to ask them why, what caused the bad credit history.

Is the borrower for whom you will be co-signing or acted as a guarantor a reliable person that you can trust to make repayments on time and not leave you in the lurch?

Has the borrower considered alternative means of finance? For example, could they do more hours at work, or take on a second job. Maybe they have items which they could be willing to sell rather than take out a loan

What is an Authorised User

An Authorised user is simply someone who you have allowed to use your account.

An example would be if you applied for a credit card you can authorise the credit card company to issue another credit card from the same account to an authorised user.

The authorised user will have access to the funds in the account and will be able to spend but will not be responsible for paying back the money.

We hope that this guide has proved useful in explaining the differences between a co-signer, being a guarantor, and an authorised user.

Many people in the U.K struggle with debts and many do not know how to start to repay them speaking to a debt advisor is one of the best things you will do along with taking action yourself by speaking directly with your creditors.

Cashute is registered with The Financial Conduct Authority

https://www.nationaldebtline.org/ and https://www.moneyadviceservice.org.uk

You should always seek professional advice when handling debt problems. Cashute are not licensed debt advisers and any information contained in this article should not be taken as legal advice. It is your Responsibility to seek out correct legal advice

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