With most cars, homes, and even consumer goods costing a pretty penny in many parts of the United States, it is almost a sure thing that you will need to secure a loan of some kind during your life. While this is fine if you have your finances in check and/or have great credit, it can pose some problems for those who struggle in those areas.
How will your consumer debt affect you? Find out here.
While there are bad credit loan options for those who struggle with debt, they can be more expensive and can come with some very strict terms or conditions. So, while they are a good option for many Americans, they might not be the best choice for everyone.
Consider A Co-signer Instead
Co-signing is a common practice that allows an individual with good credit and finances to help someone out who is struggling to get a better loan and interest rate. Let’s take a look at how a cosigner can help you get the loan and rates you want.
To learn more about bad credit, read this.
What is a Co-signer?
A cosigner is basically someone who is promising to pay off the remainder of the loan if the borrower is unable to pay it back for some reason. You are basically helping them get a loan by agreeing to cover for them, if and when they default. It is common for parents to cosign a loan for their children’s first car. Of course, some people might cosign for their friends or family members if they don’t have very good credit.
How Can Using a Co-signer Help Get a Loan?
So, why does getting a co-signer allow someone to potentially get a better loan? Well while we wish we could all be good with the money we earn, that isn’t always the case with some people. For those who have defaulted on loans or missed multiple payments, typically their credit will suffer as a result.
Look here to know what really happens when you ruin your credit.
Getting a fairly priced loan becomes quite difficult for these people. Instead of them opting to go with predatory payday loans or high-interest credit cards, they can simply get a co-signer. A co-signer can use their good credit history and score to essentially “vouch” for the borrower. This makes them a less risky option than before, as they now have someone in their corner who will pay off their loan should they become unable to. This opens up access to many more loans for the borrower and will save them a lot of money in interest as well.
The Pros and Cons of Co-Signing a Loan
However, while having a co-signer can be good for the person trying to get the loan, it isn’t always a great plan for the co-signer themselves. To help you decide whether becoming a co-signer is a good idea or not, we’ll take a look at a few pros and cons that come along with co-signing a loan for someone else.
Pros
- You get to help a friend or family member secure the financing they need. As we mentioned, getting a loan is quite important for a variety of things in life. You will get to feel good about helping them and they’ll be saving money in the long run.
- Because you are attached to the loan by name, whenever loan payments are made on time it will look good for you and help increase your credit score even further. Of course, this co-signer agreement will also help the original borrower increase their credit.
- You get to save someone from entering the predatory loan market. Many “bad credit” loan options (though not all of them), have extremely high-interest rates and other terms or fees that can make them very difficult to pay off. And if a person cannot pay off a predatory loan such as this, they often need to get another one to cover for it, which leads to an endless cycle of debt.
Click here to read about the effects of the revolving debt cycle.
Cons
- In terms of a material or physical benefit, you will not get any. You won’t get any monetary bonus, no discount on your next loan or anything of the sort. You are basically only doing it out of the good of your heart and to help a friend or family member.
- You are fully responsible for the loan, just as much as the original borrower is. If the main borrower stops making their payments, it will be up to you to cover for them. Not only that, but your credit score and credit report could even take a hit if you fall behind on the loan payments.
- Even if you do not have to make payments immediately (or ever), you will likely need to keep track of the ones being made by the main borrower. You cannot simply trust their word. Always check for yourself to make sure you aren’t on the hook for any payments.
So, while it is an acceptable option for some, it’s important to be aware of the potential risks associated with such a decision. You should only cosign for someone if you trust them wholeheartedly and they really need the assistance.
Read this to know what happens when you can’t make your loan payments on time.
Tread Lightly
It’s best to be careful when either getting a co-signer for your loan or becoming a co-signer for someone else. It could add unneeded strain to a relationship and lead to a lot of potential stress for everyone involved. Speak to a professional financial advisor before you make your decision.