Accommodation Loan

Definition

The term accommodation loan refers to an agreement that allows one co-signer to take responsibility for the credit liability of the other.  Accommodation loans allow the guarantor to increase the creditworthiness of the loan.

Explanation

An accommodation loan involves a legal agreement between two parties.  One of the parties, referred to as the guarantor, is a co-signer for a loan along with the second party, referred to as the receiver.  As part of the agreement, the guarantor states they will be responsible for the debt of the receiver.  This means the guarantor will continue to make payments on the loan if the receiver goes into default.

By guaranteeing the continuation of payments, the receiver will be offered more attractive terms and conditions.  Assuming credit liability for the receiver results in lower financing costs, including a lower rate of interest charged on the loan.

Related Terms

account in-trust, accredited investor