Completing an application for a loan, whether it is a credit card, car loan or mortgage, often requires a credit reference. Depending on the state of your credit history and finances, it may require a co-signer too. There are some similarities between the two roles, as both a reference and a co-signer are in some way vouching for you. There is also a major difference between a reference and a co-signer.
Credit Reference Explained
When you fill out a job application, you usually have to supply references. The same is true when you complete a credit application. The reference can be a family member or a friend. You can also use business contacts. The lender can contact your references to ask them questions about you. For example, if a lender cannot find you, it can ask your reference for your current address and telephone number. A credit reference does not have any responsibility for your loan, nor can he use the money for himself.
You don't always need a co-signer. Some lenders may require one if you do not earn much money compared to the size of the loan or if you have a negative credit history. A co-signer guarantees your loan. That means that if you fail to pay it, the responsibility falls to the co-signer. Although the co-signer cannot use the credit card or other loan money himself, it directly impacts his credit history and score if you fail to pay it.
Risks of Co-Signing
According to the Federal Trade Commission, up to three-quarters of all co-signers end up having to pay a loan that has gone into default. If a co-signer puts up his personal property -- such as a house or car -- as collateral on the loan, he risks losing it. If the other person on the loan misses payments, the lender has the right in many states to go after the co-signer instead, according to the FTC. A co-signer can be sued for the loan as well.
Fair Debt Collection Practices Act
A collector can contact a credit reference to ask about you if you miss payments and the collector cannot find you. Under the Fair Debt Collection Practices Act, the collector is limited in what he can say to your credit reference. The collector can usually only contact the reference once, according to the law, and can only ask for your contact information and work information. The collector has no legal right to demand payment from the credit reference.