Families and individuals with a significant level of wealth sometimes hold misinformed assumptions regarding their creditworthiness and ability to qualify for a loan. For example, many people believe that an unused line of credit improves their credit profile. It can actually do the opposite. Others assume that cash flow isn’t important because they have significant liquid assets. The truth is most lenders look first for recurring income when determining creditworthiness, and then look to money in the bank and other assets.
Those are just a couple of the commonly held misconceptions regarding lending. In the following, Mark Foster, head of banking and credit advisory, sets the record straight about what is myth and what is reality.
Myth
I’m a guarantor on a loan that is being paid for directly by the borrower, so that shouldn’t affect how a bank views my creditworthiness.
Reality
Loan guarantees absolutely can affect how a bank views your creditworthiness.
“Lenders can and do analyze loans that are guaranteed and will take that ‘contingent liability’ into account when determining creditworthiness. That may affect the guarantor’s ability to get additional debt,” Foster explains.
For example, say someone owns a collectible coin business that has taken out a business loan. In order to be approved for that loan the owner had to personally guarantee it. If the business can’t pay back its debt, as a guarantor, the owner would be responsible.
“Even though a guarantor isn’t liable for making payments unless the borrower defaults, lenders can consider the likelihood of that possibility when evaluating the guarantor as a borrower,” Foster says. “But not all lenders are the same. Some make adjustments for all loan guarantees. Others may only make adjustments if the borrower can’t show the ability to repay. It’s important to be aware of that possibility when providing a guarantee.”
Myth