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You’ll see the term “borrower” used when buying a new home, financing a car, or obtaining a business loan. Read on to learn about the meaning of borrower, examples, and how it differs from a lender.
A borrower is a person or entity that has been given money that must be repaid in the future. When an individual or business needs to buy something that they don’t have the money to pay for, they obtain a loan from a bank and pay the loan back over a set period of time with interest.
The terms of a loan, including maturity date and interest rate are spelled out in loan documentation which is signed by both the lender and borrower making it a legally binding contract. If the borrower fails to make on-time payments, the loan can go into default.
Difference Between Borrower and Lender
When a business obtains a loan from a bank, the business is considered the borrower and the bank is considered the lender. Similarly, when a person obtains a loan from a business, the person is the borrower and the business is the lender.
Let’s pretend a married couple would like to buy a house to raise their family in. Houses in their area are selling for $400,000 and up. Since most people don’t have this much money in their bank accounts, the best option is to borrow money from a bank. With a small down payment, the couple could afford to buy a house even though they don’t have the money for it.
Once the couple fills out a loan application, the bank will ask for proof of income and analyze their capacity to pay the loan back.
Importance In Loan Documentation
Although the meaning of borrower is simple, it is important when understanding a loan agreement or promissory note due to the legal implications of these documents. The terms “borrower” and “lender” will be used many times throughout these documents and often appear in the first paragraph.
What is a Co-Signer?
When somebody borrows money, there will sometimes be a co-signer on the loan. A co-signer is someone who agrees to be responsible for the borrower’s debt if the borrower defaults on the loan. Co-signers are common on student loans where a student is the borrower and a parent is the co-signer. If the student doesn’t pay the loan back, the parent is responsible for paying the debt back.