Co-signing a loan - what to consider?

Before you agree to cosign a loan, there are several points to pay attention to. Study them carefully before making a decision.

  • Finding a cosigner is an important thing if a person with bad credit wants to get a loan. Thus, if you have a good credit history and credit report, you can become a cosigner and help your friend or family member. However, you will also have to face some risks and responsibilities for the loan. That is why it is important to know who a cosigner is, and what his rights and responsibilities are.
  • If you get a high and stable salary and pay off your loans on time, you probably have a very good credit rating. However, it is important to understand that if you have good credit, your friend, a family member may ask you to co-sign a loan with him. Many people with bad credit need money to pay bills, buy a house, or repair their car. Thus, you can be their salvation, as your participation in the loan will increase the chances of getting it.
  • However, before agreeing to be a co-signer, it is important to consider both the advantages and disadvantages. On the one hand, co-signing another person’s loan can improve your credit history if repayment is made on time. On the other hand, if the borrower cannot pay off the debt, you will be responsible, which can negatively affect your credit. Therefore, it is worth considering all the possible risks associated with co-signing before making this decision. Even though you can help a loved one, do not forget about yourself. Learn the basics about co-signing and make the right choice.

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Being a co-signer - Basic information

A co-signer is a person who agrees to repay the borrower's debt in the case he cannot repay it on his own. It is important to note that a co-signer does not make any profit from helping a borrower obtain a loan. Thus, a co-signer agrees to be responsible for the borrowed loan if the borrower does not fulfill his obligations and cannot repay the debt according to the terms of the contract.

So, a co-signer is a kind of guarantee for the lender. By having someone with good credit, the borrower is more likely to have his loan approved. Moreover, having a co-signer can also increase the amount that the borrower can receive.

Co-signers sign loan documents outlining their responsibilities. Thus, before becoming a co-signer, it is important to carefully study the contract in order not to get unwanted liability, unfavorable terms and so on. It is also important to note that no one can make you a co-signer without your consent.

Co-signer rights and responsibilities

Of course, co-signing a loan is an important step for both parties, which is why it is important to be prepared for the consequences. If you are thinking of becoming a co-signer, it is important to explore not only your rights but also your responsibilities. The list below will help you figure out what to expect from co-signing.

Ownership and collateral

First of all, it's worth talking about ownership of property. It is important to know that if the loan has security, such as a car, you have no right to it. Thus, you do not receive money or other financial benefits for participating in the loan.

Debt and its repayment

Of course, the borrower must make regular monthly payments on the loan in order to cover the debt and avoid additional problems. However, any responsible person should understand that circumstances do not always work out the way we want. Thus, the borrower may not be able to pay off the loan on time and it will become your financial responsibility. You are a guarantee to the lender that the debt will be paid on time. So, if the borrower is unable to repay the loan for any reason, you are the next person to do so.

Moreover, it is important to note that depending on how late the payment was made, you may also receive both penalties and late fees, so it is important to make sure that you are prepared for this before becoming a co-signer for someone.

Loan application

As already mentioned, you are a kind of guarantee for the lender that the loan will be repaid on time. Thus, he will look at all of your financial data, such as your credit score and credit history, income, debt, and more. Since the borrower cannot meet the requirements on his own, you will have to do it instead. Thus, you will most likely have to go through a hard credit check in order for your loan application to be approved.

Impact on your credit

As you know, only a person with good credit and regular income can become a co-signer. However, how can this affect your credit?

Of course, if the payment is made on time and you don't have any problems with both the borrower and the lender, you can even improve your credit rating. However, it is much more important to understand the risks associated with the fact that the borrower can fail you.

If you become a co-signer, you must understand that your credit history can be damaged as well. If the borrower misses payments or makes payments late, your credit history will be worsened. It is important to understand that any actions on the loan are tied to both his and your credit rating.

A co-signer release

If the primary signer on the loan stops making payments, you are eligible to request a co-signer release. It is important to note that if you want to free yourself from the loan, then the borrower will have to sign documents that release you from obligations. Moreover, the lender must also approve the removal of the co-signer.

Before you cosign a loan 

Of course, co-signing is not an easy decision. On the one hand, your loan can help your friend or family member get money to solve financial difficulties. On the other hand, you are risking your credit rating, which is often not easy to recover. Thus, it is important to consider a few things before agreeing to be someone else's co-signer.

  • First of all, it is important to pay attention to your financial situation. Of course, lenders want to deal with co-signers with a high credit score, a good credit report, and a history of on-time payments. Of course, if they are going to lend money to an unreliable borrower, you will be a guarantee. Moreover, lenders will want to see a co-signer with a good and high income who can prove it. Make sure you meet these requirements before you agree. Also ask yourself the question: are you willing to risk your credit if the borrower cannot repay the debt?
  • Next, it is important to be aware of the type of loan that you are going to co-sign. Of course, an unsecured loan such as an installment loan or a payday loan is less risky than a title loan, for example. Any secured loan is risky for the borrower as it provides collateral, such as a car, in order to obtain a loan. Thus, the risk that the borrower receives can also affect the co-signer.
  • Another important step is to consider the person who wants you to be his co-signer. Some people become co-signers for their children to help them build up credit. In this case, you understand that it may be beneficial in the future.
  • However, if a friend or other relative has asked you to become their co-signer, it is important to make sure you truly trust the person before agreeing to do so. If you are confident that the person will not let you down, repay the loan on time and will not risk your credit rating, you can accept this offer. This way you will improve your credit. However, if your friend or relative is not as reliable as you would like to see him, you should not put your stable and good credit history at risk, otherwise you can significantly worsen it.

Co-signer or co-borrower. Which to choose?

You may not have known this, but there are two types of parties that can apply for a loan with the borrower. The first one is a co-signer, which you just went through the basic information about. However, it is worth considering the second option - a co-borrower. Both options are responsible for the property and his debt in the event that the borrower cannot pay it off on his own. As well as a co-signer and a co-borrower must have a good credit rating and a stable salary in order to be able to apply with the main borrower. However, what is the difference?

  • Co-signers are often used to help borrowers get the amount they need to solve urgent problems. The lender takes into account the income, credit report and rating, and debt-to-income of a co-signer before approving the application. Also, the co-signer does not have the right to property, such as a house, car or other, but is obliged to pay off the loan debt if the borrower cannot do it on his own.
  • Co-borrowers, unlike co-signers, have a right to property and also share the repayment obligation on an equal basis with another borrower. As in the case of co-signer, lenders conduct a hard credit check, study the credit rating, report, assets, etc. in order to approve the application.

Thus, co-borrowers have more rights and benefits than co-signers. So, if your friend or relative wants you to help them get a loan, it may be worth considering becoming a co-borrower in order to qualify for the property.