Co-signing a loan may make the borrower more eligible, but it could also be detrimental to your credit and financial situation. If your credit score exceeds that of your partner, child, or friend, you might be asked to co-sign a loan. But even something that seems honorable, like helping someone pay for a new house or college tuition, can have unexpected results.
In this article, we will see what a Co-signer loan is, its benefits, and all the information you possibly need. You will also learn how Money-Wise can help you with Co-signer loans. Keep reading to know more in detail about the same!
What Is A Cosigner?
A co-signer is someone who adds their name to the loan application of the primary borrower, indicating their willingness to be held accountable for the loan balance and any additional organization fee in the event the borrower cannot pay.
Most people seek or want a co-signer because they cannot meet the loan requirements independently. If you have a solid financial background, co-signing for someone who has a weaker credit history can increase their chances of approval or obtaining a lower interest rate.
A co-signed loan differs from a joint loan in that both borrowers have equal access to the funds, even though they may be responsible for repayment.
Anyone who qualifies can act as a co-signer, and your lender will decide if they do or not.
However, a co-signer will typically be someone you can rely on financially, such as someone with better credit or a more steady income than you, as you will need to rely on this person if you cannot make your loan payments on your own.
Pros & Cons Of Cosigning A Loan
You become incredibly susceptible when you co-sign for someone else’s loan. Here are the advantages and disadvantages to consider, as well as tips on safeguarding your finances and your relationship, should you decide to co-sign.
The advantages of co-signing a loan are numerous. The benefit of co-signing a loan for someone is obvious: you can help them qualify for financial aid for college, a credit card, or other financial products they couldn’t otherwise obtain, or you can get them a better interest rate to save them money on their loan.
Having a co-signer with a strong credit score and a long credit history is helpful for people who are just starting with credit or rebuilding their finances. Before applying, make sure the lender accepts co-signers. Not all online personal loan lenders do.
- The entire loan balance is your responsibility.
Co-signing a loan is more than just offering your good credit history to someone else in need. They promise to make up the difference if they cannot pay their debts in full, including late fees and collection costs. Make sure you can afford the loan payments if the primary borrower cannot before agreeing to co-sign.
- Your credit is in jeopardy.
When you co-sign a loan, your credit reports and the borrower’s credit reports include the loan and the borrower’s payment history.
According to Bruce McClary, a spokesman for the National Foundation for Credit Counseling, you need to take care of your credit score in the short term. He claims that the hard credit inquiry the lender made before approving the loan and the growth in your overall debt load could lower your credit score.
But most importantly: Your credit score will suffer if the borrower misses a payment. A mistake here can seriously damage your credit because payment history significantly impacts credit scores. However, it can be easily managed.
- You might face difficulties getting credit.
Co-signing loan proceeds for a loved one comes with the long-term risk of being turned down for credit in the future. When calculating your total debt, a potential creditor will consider the co-signed loan and may decide it’s too risky to grant you additional credit. After co-signing, McClary advises checking your credit report frequently to stay on top of your finances.
- The lender might file a claim against you.
According to the Federal Trade Commission, if the lender doesn’t get paid, it may try to collect money from the co-signer in some jurisdictions before going after the primary borrower.
The borrower would have likely missed several payments before reaching that point, and the debt would already have begun to harm your credit. When the debt is between 90 and 180 days past due, the lender is likely to think about taking legal action. You are liable as the co-signer for all expenses, including legal organization fees, if the worst happens and you are sued for nonpayment.
Can Cosigning Damage Your Credit?
Your credit score is unaffected by co-signing alone. However, your score can suffer if the primary bank account holder is late on monthly payments.
- Late or missed payments: If the primary account holder fails to make payments, the co-signers are obligated to do so. Your credit score could be affected if the consignee misses or makes late payments.
- You might accumulate additional debt: Since the debt owed by the consignee will be reflected on your bad credit report, your debt may also increase. You will owe more money in the future, and this new debt will be added to the “amounts owed” section of your excellent credit report.
Concluding About The Cosigner Loan
Introducing Money-Wise, your only stop for Co-signer support. We aim to arm you with all the knowledge you need to make a sensible financial decision appropriate for your situation by providing a thorough and unbiased assessment of each lender’s rates and terms.
The following criteria were used to select the best personal loans with co-signer support: either a co-signer or a co-borrower is permitted, rates and terms of repayment that are open, different loan amounts, and low cost. We hope you now got an idea of how co-signing works. Contact us today for the same!