Proper risk management is taken by a lender when a borrower makes a loan application. Risk management is a process that a lender takes to ensure that the borrower is worthy of granting a credit or a loan. Any borrower who starts to default on payments will become a bad credit for the licensed moneylender. And in some instances, losing the capacity to collect becomes a receivable that needs to be written off. This will now be considered as a loss by the lender.
There are several ways that a lender can minimize this risk of loss. One way is through securing an asset that a lender may sell once the borrower defaults payment. Another way is binding a third person to the loan who will take responsibility over the loan at a certain period or through an action (or inaction) of the borrower.
This third person can be referred to as a “Guarantor” or “Cosigner”. A guarantor is a person who promises or “guarantees” to pay for a borrower’s payday loan if the borrower is no longer able or decides to stop paying for the personal loan. A cosigner on the other hand is a person who agrees to be bound by the loan as a primary borrower. Below are a few points that define the difference between the two:
|When Required?||A cosigner is requested when the borrower does not meet all the requirements that is needed to be granted a personal loan. A cosigner’s financial background is essential as if the cosigner is the one making the loan. A cosigner’s financial standing is used in place of the borrower’s deficiency.||A guarantor is required when a borrower meets all requirements for being granted a loan but the lender is not fully convinced that borrower can pay. This may be due to non-financial reasons (ie. Being abroad for a long time due to nature of work which may lead to difficulty in collecting)|
|When Liable?||A cosigner’s liability begins at the onset of the loan agreement. Soon as the agreement takes effect, the cosigner has an equal liability as the borrower.||A guarantor becomes liable depends on the agreement. Often, they become liable when a borrower starts to default on their payments.|
|Benefits?||Creates additional value to the loan amount because of the better financial standing of the cosigner compared to the borrower.||Creates a higher chance of approval but does not create additional value to the loan amount.|
|Risk?||Risk of the cosigner extends to his assets and income as he is liable as a primary borrower.||Risk of the guarantor on the liability is when the lender has exhausted all means to collect from the borrower.|