What You Need to Know About Co-Signing a Loan
Sometimes when a consumer is having a hard time getting a loan, he or she will ask someone else to co-sign. This can make it easier to qualify for that loan. Co-signing a loan is a big decision for all parties involved. It can be a complicated one too. Let’s explore co-signing in-depth.
What is Co-Signing?
Co-signing is a simple matter. Let’s see an example:
Susan has low credit or no credit, and cannot qualify for a loan on her own. Joe is a friend or family member with higher credit. Joe co-signs the loan with Susan, taking equal responsibility for it. In this situation, Susan is the primary borrower and Joe is the co-signer.
The loan is approved because Joe’s higher credit reassures the lender. If Susan defaults, Joe will pay off the loan and interest. It is important to understand that both Susan and Joe have taken on the full burden of the debt. Both parties will be held responsible if the loan is not paid off in full and on time.
Situations Where Co-Signing Might Be Logical
Co-signing might make sense if:
- The applicant needs help building credit. Say for example your son or daughter is fresh out of college and needs help building credit. Co-signing on loan with him or her may save your child a lot of time, effort and struggle.
- The applicant needs a hand qualifying. Perhaps someone has an urgent need for a loan, but insufficient credit. For example, the applicant may have a shot at starting a business, but only if he or she receives a business loan quickly. Without your help, the applicant is not going to qualify. With it, he or she will. The loan could be life-changing.
- You and the applicant are borrowing toward the same purpose. For example, co-signing a loan could be the co-signer’s indirect way of investing in the primary borrower’s new business.
Pros and Cons of Co-Signing a Loan (Different Perspectives)
Co-signing is risky, and has potential benefits and drawbacks for all parties involved.
Pros and Cons of Co-Signing a Loan from Lender’s Perspective:
Pros and Cons of Co-Signing a Loan For the Co-signer:
Pros and Cons of Co-signing a Loan For the Primary Borrower:
How to Find a Co-signer
Need to find a co-signer to help you qualify for a loan? The best bet is almost always a family member or friend. In some cases, a roommate might suffice, or a close associate.
Some companies will co-sign for you for a fee and others that will connect you with a co-signer (again for a fee). Many of these services have complaints, so exercise caution if you fall back on them.
How to Decide Whether to Co-sign on a Loan
Are you the one who is thinking about co-signing? Before you do, ask yourself the following:
- Is the primary borrower likely to be able to repay the loan?
- If the primary borrower defaults, can you afford to pay off the loan?
- Should you be forced to pay the loan off, how big a strain will it put on your relationship?
- In general, do you feel comfortable sharing a financial responsibility with the primary borrower?
If you truly can afford to co-sign, and you are prepared for the consequences if things go south, it may be a situation where co-signing is appropriate.
If the borrower is likely to default, however, or the financial or emotional burden seems potentially too great, consider avoiding the arrangement.
What Can You Do to Help Without Co-signing?
Even if you are unable to co-sign, that does not mean that you cannot help out. Here are a few ideas:
- Lend the money directly. Sometimes it makes more sense simply to lend the borrower some or all of the money yourself. You can even charge interest. At least that way you might actually profit from the situation. And if you lose, you lose less.
- Donate money. If you have the financial means to cover the cost with ease, consider simply donating the money instead. You will have done a good deed, and removed all the financial complexities from the situation.
- Do some networking. The third idea is to reach out through your own network of family, friends, and associates. Maybe you do not feel you can afford to co-sign, but someone else you know may be able to help out.
Co-signing on loan is a risky proposition. There are many situations where it does make sense, but before jumping in, it is important for both parties to evaluate whether it will be worth it. Think through all the ramifications with care before proceeding.
We strive to provide accurate information regarding personal finance and debt management, but it may not apply to an individual’s situation directly. This content is for informational purposes only and should not be considered as financial advice. PayDayAllDay.com won’t bear any responsibility in relation to personal decisions made based on it. You should consult your financial or tax advisor before making any financial decisions.
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