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A wrap-around mortgage is a form of seller financing that benefits the seller financially and helps buyers who can’t qualify for a traditional mortgage.

There are risks associated with this kind of creative financing, and alternatives to consider.

Note: SoFi does not offer wrap around mortgages at this time.

What Is a Wrap-Around Mortgage?

Traditionally, a buyer weighs the different mortgage types and obtains a mortgage loan to pay the seller for the home. The seller’s existing mortgage gets paid off, with any extra money going to the seller.

With a wrap-around mortgage, a form of owner financing, the original mortgage is kept intact, and the funds a buyer needs to purchase the home are “wrapped around” the current balance.

How Does a Wrap-Around Mortgage Work?

First, the seller must have an assumable mortgage and lender permission to wrap the mortgage. The seller and buyer agree on a price and down payment.

The buyer signs a promissory note, vowing to make agreed-upon payments to the seller. The seller might transfer the home title to the buyer at that time or when the loan is repaid.

The seller continues to make regular mortgage payments to their lender, keeping any monetary overage.

To make this feasible and worthwhile to the seller, the buyer typically pays a higher interest rate than what’s being charged on the original loan (on which the seller is still making payments).

Let’s say you want to sell your home for $200,000, and you still owe $75,000 on your mortgage at 5%. You find a buyer who is willing to pay your price but who can’t get a conventional mortgage approved.

Your buyer can give you $20,000 for a down payment. The two of you will then sign a promissory note for $180,000, at, say, 7%. You’ll make a profit on the spread between the two interest rates and the difference between the sale price and original mortgage balance.

If you’re crunching numbers, a mortgage payment calculator can help.

What Are the Advantages of a Wrap-Around Mortgage?

Here are ways that a wrap-around mortgage can benefit the buyer as well as the seller.

Benefits for the buyer:

•   A carry-back loan allows you to buy a house that you might not otherwise qualify for, perhaps because of low credit scores.

•   As long as a seller is willing to sell to you under this arrangement, your financing is essentially approved without your needing to do anything else.

•   You’ll pay no closing costs on the loan.

•   If you are self-employed, you likely won’t need to provide statements from past income as you would with a traditional mortgage lender. The seller may only be interested in your ability to pay now.

Benefits for the seller:

•   You don’t need to wait for a buyer to be approved for financing.

•   You can charge a higher interest rate than what you’re paying, allowing you the opportunity to create steady cash flow and make a profit.

•   In a buyer’s market, where the supply of homes for sale is greater than demand, your willingness to offer a wrap-around mortgage can make you stand out.

Are There Risks With Wrap-Around Mortgages?

Yes. Wrap-around mortgages come with risks for both buyers and sellers.

Risks for the buyer:

•   You’ll likely want to pay an attorney to review the agreement. If you don’t, then you’re assuming more of the risks as described in the next two bullet points.

•   You are putting your trust in the seller. If they don’t keep up the mortgage payments on the original loan, the home could go into foreclosure. (You could ask to make payments directly to the lender, which the seller may or may not agree to.)

•   If the seller has not told their lender about the arrangement, this could lead to problems. If the original mortgage has a due-on-sale clause, the financial institution could demand payment in full from the seller.

Risks for the seller:

•   The buyer may not make payments on time — or could stop making them altogether. If this happens, you still owe mortgage payments to your lender.

•   Any lag in making your payments can have a significant negative impact on your credit scores, making it more challenging to get good interest rates on loans.

•   Suing the buyer for past-due funds can get expensive, and if the buyer doesn’t have the money to pay you, this may not provide you with any real mortgage relief.

If you’re shopping for a mortgage, it can make sense to explore alternatives. A home loan help center is a good place to start.

Alternatives to Wrap-Around Mortgages

Alternatives can include the following:

•   FHA loans

•   VA loans

•   USDA loans

Here’s an overview of each.

FHA Loans

With loans insured by the Federal Housing Administration, FHA-approved lenders can offer low down payments while easing up on credit scores required to qualify.

VA Loans

The U.S. Department of Veterans Affairs offers low-interest-rate VA loans directly to qualifying borrowers (based on service history and duty status) and backs loans made by participating lenders.

USDA Loans

The U.S. Department of Agriculture guarantees USDA loans for qualifying rural Americans who have low to moderate levels of income. The USDA also offers funding to improve homes to safe and sanitary standards.

The Takeaway

A wrap-around mortgage could sound enticing, but buyer beware. Taking time to repair damaged credit or looking into other types of loans might make more sense. If you do enter into this transaction, you’ll probably want to involve a lawyer to make sure your interests are protected.

FAQ

Is a wrap-around mortgage a good idea?

This type of mortgage has benefits and risks for both the buyer and the seller.

What is an example of a wrap-around mortgage?

Let’s say a buyer can’t get traditional financing but agrees to purchase a $250,000 house from the seller, with some down payment. The seller still owes $50,000. The buyer agrees to make payments to the seller on the purchase price, and the seller uses a portion of that money to make the usual mortgage payments. The seller profits from charging a higher interest rate than that of the original mortgage.

Who is responsible for a wrap-around loan?

The buyer will be responsible for making payments to the seller according to the agreement signed by the two parties. The seller will be responsible for continuing to make payments on the original mortgage until it is paid off. So both parties have responsibilities to fulfill.

Can wrap-around loans help a buyer purchase a home?

Yes. The key benefit for buyers is that seller financing helps them purchase a home that they otherwise may not have been able to own.

Photo credit: iStock/Tatiana Buzmakova

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

SoFi Mortgages
Terms, conditions, and state restrictions apply. Not all products are available in all states. See SoFi.com/eligibility-criteria for more information.

SOHL-Q224-1904627-V1

A joint credit card account is a way for you and a spouse, partner, family member, or trusted friend to co-own a line of credit. A joint credit card is in both of your names, meaning both parties are equally responsible for the debt that the card accrues.

Joint credit cards can make sharing finances with a domestic partner easier, but if you’re not on the same page about using the card and paying off debt, it could mean trouble for your credit score and your relationship. Here, learn the full story on joint credit cards and their pros and cons.

What Is a Joint Credit Card Account?

A joint credit card allows two people to fully share in the responsibility of spending with a credit card and paying it off. Each cardholder receives a physical card to use, and each also has full access to credit card statements and payments.

Otherwise, a joint credit card operates just like a traditional credit card — with a credit limit and interest rate on borrowed funds. If you carry over a balance month to month, that balance will accrue interest, and both joint account owners are equally on the hook for paying it back, even if one person is doing most of the spending.

Because a joint credit card is in both owners’ names, it impacts both users’ credit scores. Making regular monthly payments in full and maintaining a low credit utilization could build both cardholders’ scores. On the other hand, late payments and accumulated debt might bring credit scores down.

Recommended: When Are Credit Card Payments Due?

Ways You Can Share a Credit Card

Joint credit card accounts are just one type of shared credit card. Before deciding to apply for a joint credit card, consider whether adding someone as an authorized user on a credit card might be a better option for your situation.

Authorized User

Instead of applying for a credit card with a co-owner, you can make someone an authorized user on an existing credit card. Unlike with a joint account credit card, only one person serves as the cardholder and bears the full responsibility of the card.

The authorized user, on the other hand, can get their own physical card and use it as they see fit. However, the authorized user cannot make larger changes to the card, like requesting an increase in credit limit.

Some, though not all, credit card issuers report authorized users’ activity to the three major credit bureaus. Assuming the main cardholder uses the card responsibly (meaning they make on-time payments and keep credit utilization low), this can reflect well on the authorized user and potentially improve their credit score.

Adding an authorized user can be a good solution for spouses or domestic partners with shared expenses. If one partner has a strong credit score but the other is struggling, the struggling partner might benefit from becoming an authorized user on the other’s card. Additionally, parents who want their children to learn about using a credit card or find comfort knowing their teenage kids have a spending option in emergencies might also benefit from a card with an authorized user.

A caveat: If the main credit cardholder mismanages their credit card and the card issuer reports authorized users to the credit bureaus, this could potentially lower the authorized user’s score rather than helping to build it.

Joint Cardholder

As previously mentioned, joint cardholders share equal responsibility for how the card is used and paid off. Just as there are pros and cons of joint bank accounts, this arrangement can have benefits and drawbacks. A joint credit card enables spouses and domestic partners to approach their finances on equal footing, but a poorly managed card can have major negative impacts on the other.

Sharing a joint credit card requires implicit trust between the co-owners. Partners who disagree about managing finances might not find a joint credit card a good option.

Differences Between Authorized Users and Joint Accounts

Here’s a closer look at the differences between authorized users and joint accounts.

Privileges

Joint cardholders share the same level of privileges on a credit card. Authorized users, however, cannot increase the credit limit or add additional authorized users. On top of that, primary cardholders can sometimes impose spending limits on authorized users.

Number of Users

Two co-owners share a joint credit card account. With an authorized credit card, there is a single primary cardholder and one or more authorized users. The max number of permissible authorized users varies by card issuer. Some may let you add up to five.

Responsibility

Both co-owners share equal responsibility for a joint credit card account. Authorized users are not responsible for payments, but how the credit card is managed can impact the authorized user’s credit score.

Impact on Credit Score

Both joint credit cards and cards with authorized users can impact credit scores of everyone attached to the card. Authorized users just have less control over how the card is managed, so they must put their faith in the hands of the primary cardholder.

Recommended: How to Avoid Interest On a Credit Card

Pros of a Joint Credit Card Account

What are the benefits of a joint credit card? Here are some potential perks of this setup:

•   Equal control: Spouses and domestic partners who want equal control of their finances can benefit from a joint credit card, which affords them equal access to spending, statements, and payments.

•   Convenience of one shared card: If you share finances with a partner, having one credit card with one payment date might be easier than juggling multiple cards and due dates.

•   Potential to boost credit score or get a better rate: If one co-owner lacks a credit history or has a lower credit score, being a co-owner on a well-managed joint credit card could build their score. The person with the lower score might even qualify for a card with a better rate by applying with a joint cardholder.

Cons of a Joint Credit Card Account

There are some drawbacks to joint credit cards, however:

•   Shared repercussions for mismanagement: If one co-owner maxes out the card or misses a payment they said they would make, both cardholders share the burden, which can include late fees, a credit score impact, or growing interest. And if your partner decides not to do anything about the growing credit card debt, you could be on your own in paying off their shopping spree.

•   Difficulty of removing someone: Removing someone from a joint credit card can be challenging. Your only option for getting out of a bad situation might be paying off and closing the card.

•   Possibility of damage to the relationship: If you and a partner do not share the same financial philosophy, entangling your debts might do more harm than good. Couples who already fight about making financial decisions may find that sharing a joint credit card is detrimental to their relationship.

Applying for a Joint Credit Card

Does a joint account sound right for your situation? Here’s how to apply for a joint credit card:

1.    Find a credit card issuer with a joint credit card option: Not every credit card issuer offers joint cards. Understand that your options will be more limited than if you applied for a credit card by yourself. Just as you would if you were choosing a joint bank account, take the time to compare a few options and find a joint credit card you’re both happy with.

2.    Understand the qualification requirements: Read the fine print to make sure you and your co-owner can qualify. It’s not just your own credit score and credit history you have to consider; credit card issuers will be reviewing both applicants to determine if you can get a joint credit card.

3.    Fill out the application: Have all of the necessary information for both applicants handy. It’s a good idea to apply together at a computer, if possible.

4.    Set the ground rules: Make sure both of you are on the same page about how you will use the card and who is responsible for making on-time payments. If you’re not sure where to start, check out these basic credit card rules, which can promote healthy card usage.

The Takeaway

Joint credit cards give both co-owners equal responsibility for credit card usage and payments. Using a joint credit card can be a good way to combine finances and help boost a partner’s credit score. However, applicants might benefit from going the authorized user route instead. Understanding the risks of both options is important before completing a joint credit card application or making someone an authorized user on an existing card.

Whether you're looking to build credit, apply for a new credit card, or save money with the cards you have, it's important to understand the options that are best for you. Learn more about credit cards by exploring this credit card guide.

FAQ

Do joint credit cards affect both credit scores?

Joint credit cards affect both users’ credit scores equally. A well-managed card that is paid off in full each month might build both users’ scores. On the other hand, regularly late payments and a high credit utilization could bring both scores down.

Can I add someone to my credit card as a joint account holder?

Not every credit card issuer offers joint account credit cards. However, most allow you to add authorized users to existing credit cards. Contact your credit card issuer to learn more.

What requirements are needed to get a joint credit card account?

Requirements for getting a joint credit card account will vary by credit card issuer. Credit card companies typically consider factors like age, credit score, and income to determine whether you can get a joint credit card.

Photo credit: iStock/gorodenkoff

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .

SOCC-Q224-1909300-V1

If you finance a home, the lender will have you sign either a deed of trust or a mortgage. A mortgage is an agreement between you and the lender, but a deed of trust adds a neutral third party that holds title to the real estate.

Many states allow either choice. Thanks to an easier foreclosure process, many lenders prefer a deed of trust to a mortgage, so it is important for borrowers to grasp the nuances of these documents.

Mortgage Loans 101

To understand the difference between a deed of trust and a mortgage, it helps to first know some mortgage basics. A mortgage is a loan that’s used to purchase a piece of real estate. First, the borrower applies for a loan from among the different mortgage types. Once approved, they sign a mortgage note, promising to pay the lender back over a specified time with agreed-upon terms. The real estate serves as collateral for the loan.

Note: SoFi does not offer a Deed of Trust at this time.

You may hear a mortgage note referred to as a promissory note. In any case, it’s a legally binding document.

Mortgage Transfer

A mortgage transfer takes place when a borrower assigns what is typically an assumable mortgage to another person. Most mortgage loans are non-transferable. That said, in the case of marital separation, divorce, death, or other unusual circumstance, a mortgage transfer is sometimes permitted.

FHA, VA, and USDA loans, insured by the government and issued by private lenders, are assumable if the buyer qualifies.

Mortgage Foreclosure

When a borrower defaults on making mortgage loan payments as agreed upon, the lender may start legal proceedings to take ownership of the property and resell it to recover funds owed to the financial institution.

A mortgage foreclosure can take place when a borrower doesn’t meet other terms of the agreement, but failing to make payments is the most common reason. A variety of mortgage relief programs help borrowers stave off foreclosure.

What Is a Deed of Trust?

Some states incorporate a deed of trust into their home loan process, while financial institutions in other states can choose to do so or not. A deed of trust is an agreement that’s signed at a home’s closing that states how a neutral third party — typically the title company — will hold legal title to the home until the borrower pays the loan off. (It is not the same thing as the deed to the house.)

Terms to know include the following:

•   Trustor: the borrower

•   Beneficiary: the financial institution loaning the money

•   Trustee: a third party that will legally hold the title until the loan is paid off

Deed of Trust Transfer

If the borrower pays off the mortgage loan, the third-party trustee dissolves the trust involved and transfers the title of the real estate to the borrower.

If the borrower sells the home before the balance owed is paid in full, the trustee takes the sales proceeds and pays the lender what is still owed and gives the borrower/trustor the rest of the money.

Deed of Trust Foreclosure

As with a mortgage, there are clauses in the deed of trust agreement that will trigger foreclosure proceedings. In this case, the trustee will sell the property and distribute the funds appropriately.

Similarities Between a Mortgage and a Deed of Trust

Both a mortgage and a deed of trust are used when someone buys a home and takes out a loan to complete the purchase. Under each structure, the lender has the option to foreclose on the home if terms and conditions agreed upon by the buyer are not met.

In states where either option is allowed, the lender will decide which one to use.

Key Differences Between a Mortgage and a Deed of Trust

Here’s the big one: ease of foreclosure by a private trust company when a deed of trust is in place. But let’s look at how all the differences line up, below.

How to Determine If You Have a Mortgage or a Deed of Trust

Although deed of trust versus mortgage differences may seem reasonably small, it can make sense to be clear about which one you have. Look at a mortgage statement to find your loan servicer and ask.

A longer route: Mortgages and deeds of trust are publicly filed documents, so you could seek out the local government agency that manages these kinds of records and get a copy.

The Takeaway

A deed of trust and a mortgage are the two main systems for securing home loans. One key difference is the presence of a neutral third party in deeds of trust. The trustee holds legal rights over the real estate securing the loan. It’s easy to get lost in the forest of mortgage matters. A mortgage help center can lend a hand.

Looking for an affordable option for a home mortgage loan? SoFi can help: We offer low down payments (as little as 3% - 5%*) with our competitive and flexible home mortgage loans. Plus, applying is extra convenient: It's online, with access to one-on-one help.

FAQ

Who can be listed on a deed of trust or mortgage?

On a deed of trust, all three parties are listed: the trustor (borrower), beneficiary (lender), and trustee (third party that holds the title until the loan is paid in full). With a mortgage, there is no third party involved.

How are mortgages and deeds of trust recorded in public records?

A deed of trust will be filed and recorded in public records in the county where the house exists. A similar process takes place for mortgage deed recordings. The recorded documents could be located at a county clerk’s office, a public recorder’s office, or an office of public records.

Is your title separate from deed of trust and mortgage?

Yes. A title is a concept rather than a physical document like a deed of trust or a mortgage note, and it refers to a person’s legal ownership of a home or other property. When a property is sold, the title is transferred from the current owner to the buyer.

Does a mortgage involve a trustee like a deed of trust?

No. Deeds of trust require a trustee, but a mortgage does not.

Photo credit: iStock/zimmytws

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

SoFi Mortgages
Terms, conditions, and state restrictions apply. Not all products are available in all states. See SoFi.com/eligibility-criteria for more information.

SOHL-Q224-1903200-V1

Whether you’re renting a car to use while on vacation or because your usual vehicle is temporarily out of commission, you might have been asked if you’d like to purchase additional car rental protection. If you paid for your car rental reservation using a credit card, your card may already offer some form of rental protection. However, not all credit cards offer this benefit, and those that do provide varying car rental insurance benefits.

Learning the requirements and limits of your credit card’s car rental insurance coverage — if any at all — can help you make an informed decision when booking or picking up your car rental.

What Is Credit Card Rental Car Insurance?

Rental car insurance through a credit card is also called an “Auto Rental Collision Damage Waiver.” It generally states that if a rental car that was purchased using the card sustains damage due to an automobile collision or theft, you can file a reimbursement claim through your credit card issuer.

This might include a range of damage, from a smashed window due to theft to a car accident involving another vehicle. An Auto Rental Collision Damage Waiver typically covers damage-related costs of the vehicle itself, but it doesn’t cover stolen personal items resulting from the theft, like a laptop, or costs related to bodily injury.

Understanding Your Credit Card’s Coverage for Rentals

Not all credit card car rental insurance terms offer the same level of coverage. For example, some credit card rental car insurance only kicks in after your personal auto insurance coverage and with reimbursement limitations.

Credit card car insurance generally falls into one of two categories: primary or secondary coverage.

Primary Coverage

Certain issuers offer credit card rental car insurance as primary coverage. Primary coverage means that, in the event of damage or theft, you can file a claim directly through the card issuer for reimbursement. You’re not required to file a claim through other insurance sources, like your personal auto insurance company, before the primary credit card car rental insurance benefit applies.

Secondary Coverage

Unlike primary coverage, secondary coverage rental car insurance protection through a credit card offers supplemental reimbursement. With secondary coverage, you’ll first need to file a claim through your personal insurance coverage policy or other sources, such as supplemental insurance through the rental company.

What if you’ve reached your maximum reimbursement through other insurance sources, but you have a remaining reimbursable amount? In this scenario, your credit card rental car insurance benefit can then be used to claim the remaining amount.

Recommended: How Much Auto Insurance Do You Need?

How Does Credit Card Rental Insurance Work?

If you’re renting a car using a credit card that offers rental insurance benefits, you’ll need to follow certain steps to claim a reimbursement. Requirements might vary slightly between card issuers, but below are the general steps you can expect to follow:

1.    Use a credit card with rental insurance protection. The first question you’ll need to answer is, does my credit card cover rental car insurance? If it does, put the entire cost of the rental on your credit card. Keep that card on file with the rental company in case any eligible damage occurs.

2.    Opt out of the car rental company’s collision insurance coverage. If you purchase coverage through the rental company, that becomes the primary source of coverage instead of your credit card issuer.

3.    Pay for damages out-of-pocket. If an incident occurs involving the rental vehicle, your credit card will be charged. You’ll then file a reimbursement claim for the amount of any applicable repair costs through your credit card rental car insurance coverage. Some card issuers allow claim payments to go directly to the rental company, upon request.

4.    Maintain documentation. This includes police reports, if available, as well as rental receipts, damage charges from the car rental agency to your credit card, towing receipts, and any other documentation or proof of expenses as a result of the incident.

5.    Submit your claim ASAP. File an Auto Rental Collision Damage reimbursement claim as soon as possible, as it can take weeks to settle a claim. If your card issuer’s benefits administrator reaches out for additional information or documents, submit those details within their designated timeline to avoid issues or possible denial of your claim.

Questions to Ask Your Credit Card Issuer

In addition to learning what your own car insurance covers, it’s important to know your credit card’s rules around its Auto Rental Collision Damage Waiver benefit. If you’re unclear about how your card can protect you while using a rental car, contact your issuer’s customer support number. Here are some important questions to ask:

•   Does the rental car insurance benefit offer primary or secondary coverage? The answer to this question can help you choose the best payment option to use for your next rental car. It will also give you a sense of what to expect if you need to file a claim.

•   What is included and not included in the coverage? In addition to reimbursements for damage, you’ll want to know if the card’s rental car insurance covers loss-of-use charges from the rental company, for example. Be clear on what isn’t eligible for reimbursement, too.

•   What are the coverage timelines? Depending on your credit card issuer, the number of days when your rental coverage is in effect might be limited.

•   Are there any countries in which the coverage is ineligible? Rental car insurance coverage might not be offered if the incident occurred in certain countries.

•   What do I need to do to ensure I’m covered? Ask what you can do on your end to ensure your rental car is covered by the credit card’s insurance benefit. This may include putting the entire purchase on the card, declining supplemental rental insurance coverage from the rental company, or other requirements stipulated by your insurer.

•   What’s the process for filing a claim? Knowing how to swiftly file a claim after an incident can offer some peace of mind during an already stressful situation.

Recommended: When Are Credit Card Payments Due

Guide to Choosing the Right Credit Card for Car Rental Insurance

If you have multiple credit cards in your rotation that offer differing levels of credit card car insurance protection, consider using the card that offers primary coverage. This helps you avoid the added step of going through your own auto insurance company before being able to successfully file a claim through the card issuer.

The next factor for consideration is coverage amounts. Your maximum reimbursement amount will vary between insurance coverages, so be mindful about how high or low this limit is. Also, pay attention to the exclusions for coverage, including ineligible countries, activities (e.g. off-roading in the rental vehicle), and restrictions on vehicle type.

Other Ways Your Card Can Protect You When You Travel

When a credit card is used responsibly, it can offer many travel-related benefits. In addition to rental car insurance coverage, some credit cards provide protection for lost luggage expenses and trip interruptions.

Credit card travel insurance is especially useful if your travel plans are canceled due to reasons like severe weather or illness.

Keep in mind that many premium travel credit cards will have higher credit score requirements, which is another reason why good credit is important if you’re interested in accessing these benefits.

Recommended: Does Applying For a Credit Card Hurt Your Credit Score?

The Takeaway

If your credit card covers rental car insurance, in many cases you can decline the duplicative car rental company’s offer for collision coverage. However, it’s worth learning whether your credit card car rental insurance coverage is primary or secondary and what its coverage limits are in case you need to file a claim

Whether you're looking to build credit, apply for a new credit card, or save money with the cards you have, it's important to understand the options that are best for you. Learn more about credit cards by exploring this credit card guide.

FAQ

Do you need a credit card to rent a car?

No, you generally do not need a credit card to rent a car through many national car rental companies, like Enterprise, Hertz, and Avis. Major car rental companies often accept a debit card to secure your rental. Depending on the rental company, your debit card may need to have the logo of a credit network, such as Visa, MasterCard, Discover, or American Express.

Do all credit cards have car rental insurance?

No, not all credit cards provide car rental insurance benefits. However, many credit cards offer this protection to some extent, whether as a primary or secondary coverage. If you’re interested in accessing this benefit, make sure to familiarize yourself with which credit cards cover rental car insurance.

How do I know if my card comes with primary or secondary insurance?

You can refer to your credit card’s terms and conditions to learn whether your credit card offers car rental insurance protection and, if it does, whether it’s primary or secondary coverage. You can also contact the customer support phone number listed on the back of your credit card to speak to a representative about your specific card’s car rental insurance benefits.

Photo credit: iStock/g-stockstudio

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

SOCC-Q224-1905346-V1

A confirmed letter of credit can be an important document to those who are launching or running a business, particularly those engaging in international trade. These letters are used to help protect both the buyer and the seller in a business-to-business transaction by adding an extra guarantee that the seller will get paid. They essentially mean that a second bank will pay the seller if the first bank fails to do so, which can inspire confidence and allow a deal to go through.

Here’s a closer look at what a confirmed letter of credit is, how it works, and its pros and cons.

What Is a Confirmed Letter of Credit?

Also known as a confirmed LC, a confirmed letter of credit is an additional guarantee for a payment by a secondary bank. It states that this additional bank will be responsible for a payment being on time and in full even if the buyer doesn’t meet their contractual obligations and the first bank (called the issuing bank) defaults on the payment. You might think of it as a kind of insurance policy or Plan B if the initial bank responsible for payment fails to do its job.

This type of document can be common in international trades, such as transactions between export and import businesses. In many cases, a guarantee may be required to conduct international transactions or when a vendor or seller has reason to doubt the first bank’s creditworthiness.

💡 Quick Tip: If your checking account doesn’t offer decent rates, why not apply for an online checking account with SoFi to earn 0.50% APY. That’s 7x based on FDIC monthly interest checking rate as of December 15, 2025. the national checking account average.

How Confirmed Letters of Credit Work

Confirmed letters of credit are commonly used as negotiable instruments, which are signed documents that promise to pay a certain sum to a specified person. They can be especially valuable in international business transactions that involve a significant payment amount for goods or services. Since the letter acts as guaranteed payment, it may take the place of a request for advance payment.

To get a regular letter of credit, the buyer will likely need to submit required documents to the first bank, including proof that certain steps have been completed. Then the bank will send appropriate documents to the seller’s bank. This paperwork shares detailed instructions on the terms and conditions, as well as how payment should be made. Depending on the agreement between the buyer and the seller, payment may be made immediately or at an agreed-upon date.

Once the letter of credit has been issued, the buyer may need the backing of a second bank, or a confirmed letter of credit. Worth noting: A fee is likely to be involved. The exact amount of this fee may depend on how good (or questionable) the first bank’s credit is. This letter usually reflects the first letter of credit and uses the same terms.

A confirmed letter of credit can protect both parties because it decreases the risk of default for the vendor or seller. Additionally, it ensures that payment is only made if all the terms are met. It can be a step to building good credit when doing a deal with a new client. It can also be helpful for a business that is just starting out and making connections, building contacts, and monitoring its credit.

Parties Involved in a Confirmed Letter of Credit

Here’s a listing of all the parties typically involved in a confirmed letter of credit.

•   Buyer or applicant: This is the party who is requesting the letter of credit and who will pay the seller.

•   Beneficiary or seller: The party who is selling goods or services and is the one who receives payment.

•   Issuing bank: This is usually a bank where the buyer already has a business bank account. It’s the one that issues the original letter of credit.

•   Confirming bank: This is the second bank that will guarantee the funds to the seller once the terms in the letter of credit are met. In some cases, the confirming bank is from the seller’s home country (this may be called a correspondent bank) or is a bank the seller already works with.

Recommended: Guide to Irrevocable Letters of Credit (ILOC)

Confirmed Letter of Credit Example

Let’s look at a fictional example of how a confirmed letter of credit could work. Say that Pauline’s Paper Goods receives an order for 100,000 pallets of customized notebooks from JessCo, a stationery company. Pauline’s Paper Goods has never worked with JessCo before and isn’t sure that this company has the means to pay for the goods. Maybe Pauline’s Paper Goods worries that JessCo doesn’t have what is considered good credit.

In order to prevent non-payment after the notebooks are produced and shipped off to the buyer, Pauline’s Paper Goods outlines an agreement that JessCo needs to pay with a confirmed letter of credit on the date the shipment leaves their warehouse.

If JessCo agrees, it would start applying for a letter of credit at its bank, where it has its checking account, in the U.S. If the bank requires it, the company needs to provide proof it has the funds available or it will apply for financing.

As soon as the issuing bank creates the letter of credit, JessCo then applies for a confirmed letter of credit with another bank, possibly the seller’s bank. When Pauline’s Paper Goods receives the completed confirmed letter, it manufactures and ships the customized notebooks. Once Pauline’s Paper Goods provides proof of when and how the goods were shipped, the guaranteed funds are released.

Recommended: Business vs Personal Checking Account: What’s the Difference?

Confirmed vs Unconfirmed Letters of Credit

If you are conducting international business, you will probably hear the terms confirmed and unconfirmed letters of credit. An unconfirmed letter of credit is simply a letter of credit issued by a bank. A confirmed letter of credit, as we’ve described above, is backed by two banks. This can foster trust if, say, there’s reason to worry the payment won’t be made.

Here’s a look at some other differences between a confirmed vs. an unconfirmed letter or credit.

•   Guaranteed payment: With a letter of credit, the issuing bank guarantees payment. With a confirmed letter of credit, however, two banks confirm payment.

•   Cost: Unconfirmed letters of credit tend to cost less than confirmed letters of credit.

•   Changes: The buyer is allowed to make changes to an unconfirmed letter of credit. With a confirmed letter of credit, both banks can modify the document.

•   Issuance: The seller only has to approach one bank for an unconfirmed letter of credit, but needs to contact two with a confirmed letter of credit.

Recommended: Guide to a Commercial Letter of Credit

Advantages of Confirmed Letters of Credit

Confirmed letters of credit can have several benefits for sellers, particularly those doing business internationally and wanting to ensure smooth transactions. These advantages include:

•   Protection for both the buyer and seller

•   An extra layer of confidence for the seller

•   A lower risk of default thanks to a reputable second bank (perhaps serving as a guarantor if the first bank has a low credit rating)

•   Buyers can seem more creditworthy, which may increase the odds that a seller will do business with them

Disadvantages of Confirmed Letters of Credit

While confirmed letters of credit can be very valuable in business, there are a couple of downsides to recognize. Disadvantages of confirmed letters of credit include:

•   It may take longer to get a confirmed letter of credit since an additional bank is involved

•   Bank fees may be higher than with an unconfirmed letter of credit

The Takeaway

A confirmed letter of credit can be a valuable business tool, especially when conducting international business. For those importing or exporting, the letter will guarantee payment for goods a company is supplying if the buyer and the buyer’s bank can’t complete the deal. Getting a confirmed letter of credit may cost more and take longer compared to an unconfirmed letter of credit, but the effort may be worth it. It can secure a transaction and open doors to doing business with new customers in a way that communicates confidence.

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FAQ

What is an unconfirmed letter of credit?

An unconfirmed letter of credit is a letter of credit that’s only been issued by one bank, known as the issuing bank. In a transaction, the buyer requests an unconfirmed letter of credit to guarantee funds will be paid on time to the seller by the bank.

Is an unconfirmed LC safe?

Yes, an unconfirmed letter of credit is safe because there is a guarantee or confirmation from one bank that payment will be made. Assuming that the issuing bank has a high credit rating, the seller can feel confident that the funds will be paid once all the conditions in the contract have been met. If the seller wants an additional layer of security, they may request a confirmed letter of credit — which means a second bank will provide payment if the first one fails to do so.

What is the risk of an unconfirmed LC?

The risk of an unconfirmed letter of credit is that the issuing bank won’t have the funds to pay the seller. That means that even if the seller completes their end of the contract, they risk losing out on funds if the issuing bank doesn’t fulfill their promise.

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