Despite the concept of the guarantor loan being well established, there is still a lot of confusion regarding the similarity between guarantor loans and joint application loans. It is very important to understand that guarantor loans are definitely not the same as joint applications and below we will highlight the differences and why the similarities could cause confusion
What is the main similarity?
The main similarity (and this is where much of the confusion arises) is that both of these loans require the signatures of two people before the loan can be agreed. Essentially, this is where the similarities begin and end though. The first and main difference is a joint loan application is where two people (typically married or residing at the same property) are looking for a loan. For any joint loan application, both applicants are equally responsible for all aspects of the loan, including jointly making the repayments. They can also jointly decide how the money is going to be used. In the eyes of the lender, this ensures that there are two applicants/borrowers of equal status.
What is the main difference?
Guarantor loans on the other hand are completely different. The loan applicant is solely responsible for making the loan repayments. The guarantor is put in place to ensure that the lender receives additional security as they will be expected to step in and make the payments should the borrower fail to do so. The role of the guarantor will remain redundant unless the applicant fails to keep up with their repayments. Only when this point has been reached will the lender call upon the guarantor to make payments. This obligation will have been made clear from the outset to the guarantor, both verbally and in writing and prior to the loan agreement being signed by all three parties (applicant, guarantor and lender). The guarantor will have to continue making payments on behalf of the borrower until the borrower is in a position to resume making their payments once more.
Another crucial difference between both loans is possibly less well publicised and this is that most joint loan applicants will not only live together but also be financially linked. This means they may share a joint bank account or jointly contribute to paying off a mortgage. By contrast, it is absolutely essential that a loan guarantor is not financially linked to the applicant in any way. This is because it would clearly undermine the legitimacy of the guarantee that they are providing to the applicant.
The majority of guarantors do not live with the applicant and there is no prior financial association between the two parties. Spouses cannot act as guarantors, but friends and family are eligible to act in this role providing they meet the other specified criteria.
By taking the above facts into account, it becomes clear that guarantor loans and joint applications are completely different instruments and are not variants of each other. A guarantor performs a specific purpose, giving the lender some comfort that the loan will still be repaid even if the borrower defaults. This in turn allows the applicant to access credit that would otherwise be declined. Joint applicants are responsible for making all of the repayments together.
Bio – Amanda Gillam
I am a freelance writer who currently works for a finance company called Solution Loans I hold a degree in financial management and I write regarding many different topics including finance, transport, travel, sport and business.