How Does a Co-Signer Work?
Other People Are Reading
-
What Is a Co-Signer
-
A co-signer is an individual who chooses to sign for a loan alongside someone else. People with poor credit scores or low incomes, for instance, may not be able to get approval for a loan, credit card, or mortgage. In order to get the financing they need, they may turn to a co-signer who has good credit. Other borrowers may not have enough information about their financial and credit histories for a lender to approve a loan, and this situation requires the borrower to find a co-signer. In return for his signature on the loan, the co-signer is promising the lender that he will repay the loan if the original borrower does not fulfill the terms of the loan.
The Responsibility of a Co-Signer
-
Legally, a co-signer bears as much responsibility for the loan as the original signer. If the main borrower does not make the necessary payments, the co-signer will have to make the payments. If not, his credit score will suffer. Lenders can, and often will, ask for payment from a co-signer if just one payment is missed or late. Sometimes the lender will ask for payment from the co-signer before pursuing all options to get the payment from the original borrower. Also, the loan appears on the co-signer's credit history, making it a potential liability when he needs to seek his own credit in the future. The loan is counted as part of the co-signer's debt-to-income ratio, which is one of the factors that a lender will consider when granting approval for a loan.
-
What to Consider When Seeking a Co-Signer
-
If you need a co-signer, you may have a hard time finding someone who is willing to co-sign for you. If you can find a co-signer, you will be handing that person a huge amount of responsibility. If you cannot afford the loan, you will be placing the burden of paying it completely on the co-signer's shoulders. This can harm your relationship with that person, so be careful when asking friends or family members to act as co-signers. Do not seek a co-signer if you cannot honestly afford the loan's monthly payment. Once you have the loan, make sure that you are responsible with your money and make your payments on time every month in order to protect the co-signer's financial status.
What to Consider Before Co-Signing
-
If you are considering becoming a co-signer for someone else, make sure that the borrower is responsible with his money. Your credit rating will suffer if the original borrower defaults on the loan. On the other hand, by co-signing a loan for a close friend or family member, you can make it possible for that person to get a car or house that is desperately needed, so you may feel that this makes it worth the risk. If you do decide to co-sign for the loan, make sure you have access to the account. Sign up for online access and duplicate statements so that you know if there are any problems and can deal with them before they affect your credit rating.
-
Resources
- Photo Credit Adrian van Leen
