Cosigning a Loan Explained

A cosigner is a person who agrees to be responsible of the debt if you fail to repay the loan. Cosigning a loan has many benefits and it may make getting the loan easier, even if you have bad credit score.

Cosigning a Loan Offers Many Benefits

cosigning a loanHaving a high credit score has numerous benefits, ranging from being eligible for most types of loans to enjoying lower interest rate. Your solid credit is noticed by your circle of family or friends, who might want you to cosign a loan.

Cosigning is steadily becoming a common practice in the lending world. As you find an opportunity to help a friend, consider seriously the risk and benefits to determine if it’s a worthy idea.

What Is a Cosigner?

A cosigner is a person who officially agrees to pay the debt if you fail to repay the loan. A cosigner will usually be someone with a good credit score which significantly improves the chances of the borrower being approved.

People such as students, who don’t have a lengthy credit history, would have difficulty getting first time credit without the help of a cosigner.

Reasons to Cosign a Loan

  1. It helps an applicant obtain financing
  2. It helps an applicant build credit

People trying to apply for a loan with poor credit history often face the grim reality of numerous loan rejections. However, lenders will often reconsider a loan application if there is a reliable cosigner backing up the applicant. Activities such a purchasing a new vehicle or attending college is thus made possible.

When you cosign a loan, you have an active share in helping a person build a better credit score, thus opening doors for future lending options.

Risks Associated with Cosigning a Loan

The first risk is that it increases your debt to income ratio, which is the percentage of your debt payment to your income. As a cosigner, you are attached to the loan especially after you sign the documents.

Another risk is that you can’t remove yourself as the cosigner. Once you accept this responsibility, you can’t take your name off the loan for the entire loan term.

You could also ruin your credit especially if the primary borrower has a history of defaulting on loans. Proceed with caution.

When Does Cosigning Make Sense?

Cosigning is ultimately a personal choice. Sometimes your personal reasons may outweigh the risks discussed above. For instance, cosigning a loan for your child to help him obtain a student loan is a worthy cause.

Cosigning might be a good idea if you don’t plan on financing anything major in the near future. If you will need a home or auto loan in future you may have difficulty obtaining one if you have cosigned a loan.

Accept the offer to cosign after examining your financial situation and be fully convinced you can afford the payments in the event of a default.

 Obligations of a Cosigner

  1. You are asked to guarantee the debt. If the borrower fails to pay, you will have to do so.
  2. You may have to pay late fees or collection costs
  3. The creditor might attempt to collect the debt first from you without trying to collect from the borrower

Additional cosigner law may apply depending on the laws of your state, so confirm these first.

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