It can be quite frustrating to see your loan request declined and many applicants experience this. For the most part, this is because they do not meet the lender’s eligibility criteria. Not having a good enough credit rating – which is proof of creditworthiness; is a common reason for this.
The question is what can be done to address the situation. The straightforward answer would be making moves to improve one’s credit rating. However, this is not often an immediate possibility. So, what else can be done?
Well, options include applying with a co-borrower or a guarantor. Both options may be acceptable and more about this will be discussed here. So, keep reading, especially to find out the distinctions between co-borrowers and guarantors.
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Who Is a Guarantor?
A guarantor is a person who legally indicates that a borrower is capable of fulfilling loan obligations. In addition to this, this person is also stating that he/she will assume the responsibility if the borrower fails to fulfill the loan’s obligations. So, this is more or less a secondary responsibility, as it would only be triggered if the borrower does not do the needful.
Who Is a Co-Borrower?
He/she is a fellow borrower sharing equal benefit and responsibility of the loan. As opposed to a guarantor that involves one primary borrower and another person standing in as a surety, co-borrowers mean that there are two, instead of one primary borrower. You can visit https://forbrukslånlavrente.com/kausjonist/ to find out more about what being a co-borrower entails.
Frequently Asked Questions about Guarantors for Consumer Loans
Some of the questions commonly asked about consumer loan guarantors are as follows:
Are Guarantors Assessed?
Lenders that demand guarantors assess their ability to fulfill the primary borrower’s obligations if the primary borrower fails to do so. As a result, credit checks to ascertain the guarantor’s financial state are conducted.
As a result, those who do not meet the financial requirements may not be accepted. In essence, the guarantor has to be financially stable enough to assume the responsibility of the primary borrower if the need ever arises. The credit checks may require submitting certain financial documents.
Are Guarantors Always a Requirement for Securing Consumer Loans?
Guarantors are not always a requirement for securing consumer loans. This is especially true if the applicant has a good credit rating and history. More often than not, the demand for guarantors arises when the lender does not sufficiently trust the applicant’s ability to repay the loan.
Can a Guarantor’s Credit Profile Be Impacted?
The guarantor’s credit profile – score and history; will not be impacted in any way if the primary borrower fulfills all the loan’s terms and conditions. However, it could be negatively affected if this is not the case.
The reason is that the guarantor would then have to assume the responsibility of the person he/she is acting as surety for. This further proves the importance of only acting in this capacity for people who can be trusted to fulfill their loan obligations.
Can a Guarantor Be Released Before the Completion of the Loan?
This may be possible but not a certainty. In cases in which this is possible, then it is because the primary borrower has proven over time that he/she is reliable and there would be no need to hold the guarantor accountable.
Frequently Asked Questions about Co-Borrowers
Some of the frequently asked questions about co-borrowers include the following:
Are Co-Borrowers More Likely to Secure Consumer Loans?
Co-borrowers are more likely to secure consumer loans than individuals who apply for these credit lines alone. The reason is that having two primary borrowers reduces the risk taken by the lender. This is considering how they have equal benefits but can assume full responsibility if one party does not fulfill the loan’s terms and conditions.
For example, imagine co-borrowers taking out a loan of 500,000 Norwegian Kroner. Technically, the lender sees it as both parties having equal access to the borrowed funds. This is more like each party having access to 250,000 Norwegian Kroner each.
However, they do not necessarily have equal liability. For example, if one party is prudent enough to pay his/her share of 250,000 (including the effective interest rate), he/she is still liable for the payment of the remaining half if the other party does not fulfill his share of the loan’s terms and conditions.
This also means that the conduct of one affects the other. For this reason, people should be mindful of who they pair with as co-borrowers.
Can Your Credit Score Be Damaged by a Co-Borrower?
The financial actions of a co-borrower can positively, as well as negatively affect the other primary borrower. This is why you should think through the decision to secure a loan with a co-applicant.
Sadly, some people have seen their credit profile negatively affected by their co-borrower’s handling of the loan. So, caution is of the essence when co-applying for credit lines with other individuals.
Is There Any Exit Strategy for Co-Borrowers?
There are possible exit strategies for co-borrowers. One such is taking out a refinance loan that would only hold a party accountable, instead of two parties. Another option is the sale of the asset that the borrowed fund was used for (if this is the case).
However, it is better not to get involved with the wrong co-borrower than to start seeking exit strategies. So, bear this in mind.
Financial Risk Involved for Guarantors and Co-Borrowers
Both guarantors and co-borrowers take some measure of risk in their various capacities. However, the guarantor may be considered as taking more risk. This is considering how he/she does not benefit from the secured loan but will be held responsible if things do not go according to plan.
It further establishes the need to only stand in as surety for people that you can trust to fulfill their loan obligations. The same also applies to co-borrowers as you should only co-apply with someone that would adhere to loan terms and conditions.
Loan applicants who do not meet lenders’ eligibility criteria stand an increased chance of securing loans with a co-borrower or guarantor. The roles of each, as well as their differences, have been discussed here.
Given the risk involved in acting in either capacity, you should only act in either of these capacities for the right loan applicant. It also means that people who need people to act in either of these capacities should understand the risk taken by these people and make it worth it.