Co-signing a loan for a family member or friend can jeopardize a person’s credit rating and overall financial situation. Before co-signing a loan, it is important to know the benefits and risks. Keep reading to learn what co-signing is and how it can affect the borrower and the co-signer.
What is co-signing?
Co-signing is signing jointly with a borrower for a loan to increase the borrower’s chances of being approved for a loan. Co-signing a loan results in joint credit for the borrower and the co-signer. The creditworthiness of both signatories is considered during the application and approval process. The primary borrower is responsible for repaying the loan. If the primary borrower is unable to repay the loan, the co-signer becomes responsible for the debt.
A co-signer can guarantee that a debt will be repaid to someone unable to obtain a loan on their own. A borrower may not qualify for a loan for different reasons. Here are some common reasons why people may not qualify for loans independently.
What is a co-signer?
A co-signer is a relief person legally responsible for making payments on a loan. When someone agrees to co-sign a loan, they help reduce the lender’s risk and help the primary borrower obtain credit. Essentially, a co-signer agrees to assume another person’s debt. If that person fails to make payments or defaults on the loan, the co-signer becomes liable.
What are the rights and obligations of a co-signer?
Typically, borrowers seek pre-approval for a loan. If they’re having trouble getting approved or not getting the best interest rates due to a low credit score or other disqualifying factors, a co-signer can come to the rescue.
The lender considers the creditworthiness of the co-signer and, if approved, the co-signer completes the loan documents that explain the terms of the loan. The lender also provides the co-signer with a document called the notice to co-signer which outlines the consequences if the borrower does not repay on time or repay the loan.
A co-signer agrees to guarantee a borrower’s debt, but has no ownership, title or other right to the property paid for by the loan. The co-signer is responsible for repaying the debt if the primary borrower does not pay.
Benefits of co-signing a loan
Co-signing primarily benefits the primary borrower who otherwise might not qualify for a loan on their own. Here are some of the benefits that co-signing offers a borrower.
- Can be approved for more favorable loan terms
- May qualify for a higher principal loan amount
- Can help build or rebuild credit
- Can get a lower interest rate
Borrowers with minimal credit history or low income may qualify for a co-signer on their loan.
Risks associated with co-signing a loan
When someone co-signs a loan for a borrower, they guarantee that they will repay the loan if the borrower is unable to pay. The borrower benefits from the creditworthiness of the co-signer, but the co-signer bears the risk. Here are some of the risks associated with co-signing a loan:
- Responsible for debt repayment for the term of the loan
- May negatively affect credit score if borrower pays late or fails to repay loan
- Extremely difficult to be released from the loan
- May be sued by lender for late fees, interest and attorney fees
Co-signers agree to take responsibility for repaying another’s loan. The risks can be great if the co-signer experiences their own financial difficulties.
Good to know
Co-signing isn’t the only way to get a loan with someone else’s help. Co-borrowing is a similar concept. The difference is that both people receive the loan and are equally responsible for making the payments. A common example of co-borrowing is a married couple applying for a mortgage together, with each applicant sharing payments and access to the property attached to the loan.
How does co-signing work?
Co-signing is considered a type of joint credit between the primary borrower and the co-signer. The borrower receives the loan principal and the co-signer does not have to make regular monthly loan payments.
The types of loans that lenders offer with cosigning options include mortgages, auto loans, student loans, and personal loans. Some credit card companies also offer consumers co-signing options to help build their credit.
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