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What are the Pros and Cons of Co-signing?

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QsId 122
Asked by Isaac Thuku
Category Personal Question
Title What are the Pros and Cons of Co-signing?
 

What is a cosigner?

Do I need a cosigner?

Should I be a cosigner?

Tags cosigner, cosigner definition, co signer
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Tuwaze MawazoTo co-sign is to sign a document that has already been signed by the borrower of money, declaring that, should the borrower be unable to repay the money, the signer will repay the money due. The signer is defined as a co-signer. The co-signer assumes equal liability for the loan. A co-signer may be an institution, but more than often is a friend or relative of the borrower – especially for personal loans.

Co-signing allows for a person with low or poor credit history eligible for a loan by making another person with good credit history (the cosigner) accountable for payment on the loan.

Individuals who have poor or little credit history might be unable to receive a loan without a co-signer. If you or someone close to you is having a hard time getting a loan, it can be advantageous to you or someone close to you to consider becoming a co-signer. However, it is wise to first assess the situation and consider all the pros and cons of co-signing. Questions such as do I need a co-signer to take the loan or should I be a co-signer, are very relevant before entering into this agreement. It is highly recommended to consider the following benefits and drawbacks if you are looking for a co-signer or when you are considering becoming the co-signer.

Advantages of co-signing

• A borrower with low/poor credit history is not going to qualify for a loan. By including a co-signer, the borrower is able to receive a loan.

• As a co-signer you get to use the good credit or income you have built up to help someone.

• If the borrower makes on-time payments every month, then as a co-signer, you have the benefit of having a successfully paid account on your credit report. This will improve your scores further if you do not have too much debt.

• There are many ways one can build credit, however anytime a loan is applied for and paid on time; it builds the borrower’s credit history, which in turn improves the credit score. The next time the borrower applies for a loan, it may be granted without the need of a co-signer.

• Consumer loans, i.e. credit cards, auto loans, and personal loans, tend to take into consideration the highest credit score available when setting the interest rate. This is advantageous to the primary borrower if he/she has someone with a higher credit score as the co-signer. This can reduce payments and/or the total interest rates charges.

Disadvantages of Co-signing

• The reason why a borrower is able to receive a loan with a co-signer when they had been unable to do so alone is because the co-signer is taking on all the responsibility if the borrower is unable to pay back the loan. The co-signer is responsible. Because the co-signer generally has a higher credit score, they have more to lose than the person receiving the loan.

• The loan you co-sign will appear in your credit score. This might affect your credit score if your debt ratio becomes too high. If the borrow is unable to pay back on time, the debt becomes yours. This means that if the borrower misses a payment, the lender has the right to come to you for payments. In case the borrower defaults on the loan, you, the co-signer can be sued for the full amount plus interest, collection fee, late fees, and attorney fees.

• If both parties are unable to make the required payments, then will end up in default for both the borrower and the co-signer, greatly impacting credit score and future loan opportunities. As a co-signer, it is advice-able to set some money aside to make loan payments in case the borrower defaults.

• In the case where both of you are unable to make the payments, the lender has the right to repossess the co-signers belongings (i.e. your house, car, e.t.c.) to cover the debt. Even if the person you co-signed with files for bankruptcy or dies and discharges their responsibility to the debt, the co-signer is not protected and must repay the full loan amount.

• Mostly, the person asked to be a co-signer is either a family member or a friend. In case the borrower is unable or misses a payment, it can cause a huge strain to the relationship. For example, if you get a family member or a close friend to co-sign with you, but you sadly get laid off and you are unable to pay your loan, your friend or family will be forced to repay the loan for you or they risk their assets being repossessed. This might strain any relationship. Co-signing introduces financial tension into personal relationships.

Conclusion

Co-signing is not something to be taken lightly. If you as a primary borrower do not qualify for a loan, a co-signer may be the only available option for you. When you get someone to co-sign on a loan with, the lender looks at both your incomes and credit score combined. The loan shall be granted if the person backing you up has good credit. It is your duty as the primary borrower to ensure that you meet the monthly payments without default. This is because the consequences that may befall the co-signer are great if he/she is unable to make the payment for you in time. Even if you have co-signed with a family member, be mindful and adhere to the terms given by your lender.

Co-signing is very helpful if your income is not high enough to qualify for a loan. Co-signing is very beneficial to the borrower. However, do not force or accept to be forced into entering into this relationship as a co-signer if you cannot afford to make payments in case the primary borrower defaults. The consequences for a co-signer are very dire and should be evaluated to great heights. As the primary borrower, it might be easier to look for other alternatives if you are uncomfortable borrowing and asking someone to carry around this great responsibility for you. Alternatives such as credit building loans can be a good place to start.
2016-02-17

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