Should I take out a loan with a co-signer?

If you think your credit score isn’t good enough to apply for and obtain a personal loan, having a co-signer have a excellent credit could be a good option. Why? Because, without a doubt, that stellar credit score would help you qualify almost immediately.

However, it is not all good news. Remember that if that person decides to help you, they would be running a great risk.. And it is that, legally and financially, it will be as responsible as you are for making the payments. So if you don’t keep your end of the bargain, you could affect his financial situation (and your relationship) hugely, and perhaps forever.

At this point, you may be wondering: should I take out a loan with a co-signer? Well, we will try to help you find the answer by identifying with you some factors that you need to take into account before asking someone to sign your next loan agreement.

What is a co-signer?

The co-signer, also called a co-signer, is a person who applies with an applicant to a joint credit, that is, as a guarantor of the loan. By doing this, your credit score will also be taken into account for loan approval. Of course, the story does not end there: by signing the document, you also acquire the legal and financial responsibility to pay it.

Another consequence of co-signing the loan is that credit will also show up on your history and affect your loan utilization rate. The main idea of ​​applying for a loan with a co-signer is give him enough confidence to the lender that you will be able to pay the money in full and within the indicated period.

Note: If your co-signer has good credit, you may have more benefits than accessing the loan. Think that if your score is stellar, you could also enjoy the lowest interest rates in the market.

Who should I choose as a co-signer?

A co-signer can be anyone, but preferably someone close and trusted, such as a family member, friend, or even your spouse. Lenders typically don’t require couples to co-sign on a loan, unless, of course, they’re both applying for it, such as a mortgage.

But if you’re married to someone who has a high credit score and your partner isn’t applying for that loan with you, then asking them to co-sign would be a great option.

Here are some characteristics that you should take into account to find a good co-signer:

  • Your potential co-signer should be able to pay the loan payments if you can’t, at least in essence.. Even if you agree to repay the loan, you must be able to prove to the lender that your finances are strong enough to cover you if you default.
  • Generally, you should have good or excellent credit in the three largest credit bureaus in the country. We are talking about a score greater than 700 (on a scale of 300 to 850 points), which is what the finance sector considers very good.
  • Your financial situation should be strong enough to accept co-signing, despite the loan note on your record. Remember that one more debt on your co-signer’s score could lower your chances of getting a loan in the future.

What should you consider before requesting a loan with a co-signer?

Before asking someone close and with good credit to sign the loan contract with you, you should consider some of the risks and limitations that could be found along the way:

Not all lenders accept co-signers

Although most banks, credit unions, and online lenders often accept co-signed loans, make sure to verify that the institution you have chosen allows it. Note that not all of them offer joint loans.

Both would be assuming a significant financial risk

Although most people who ask for a new loan from the bank do so with the best of intentions, that is, to pay on time and perhaps invest part of the money in a lucrative business, life takes so many turns that the financial situation of both could change overnight. This could lead you to not pay the installments, to fall into arrears and, therefore, to affect the score of your friend or family member.

What if. A late payment may not seem like a big deal, but keep in mind that both your co-signer’s score and yours will take a big hit.. The worst would happen if you cannot pay the monthly payment of your loan, since it will be up to the other person to pay that fee that you owe in order to get rid of a delinquent note in your payment history. If your co-signer can’t pay either, then the account will go to collections and the amounts would skyrocket, as would the consequences.

The lack of payments and collections would also have a negative effect on the credit scores of both. Worst? That note will stay on your credit history for up to seven years. All this can have a great impact on a business, financial and personal level, and it is quite possible that the relationship with your co-signer will be damaged forever.

If, on the other hand, all payments are made on time, you would also be benefiting your co-signer. Remember that payment history has a prominent weight in the calculation of credit scores. Consequently, if you pay on time, the score of both will skyrocket.

Keep reading: Credit Repair: How to Fix My Credit Fast on My Own

You may not be able to remove your co-signer from the personal loan

At some point in the life of the loan, your co-signer may ask you to remove their name from the contract. The problem with this point is that not all lenders allow joint borrowers to be released from liability. In some cases, it would be possible only if you reduce the principal amount of the loan to more than 50% and show that the payments have been made without fail and on time.

If your credit score has risen over time, then there is also the possibility of withdrawing your co-signer from the contract.. If you build a much stronger credit profile and are able to eliminate the liability of that person who applied for the loan with you, you may also be able to refinance the loan or open a revolving line of credit.

Alternatives to borrowing with a co-signer

If you are not convinced to apply for a loan with a co-signer, don’t worry! We bring you some alternatives that you could consider:

Raise your credit score

If you can wait a bit to ask for the loan, do it! In the meantime, focus on paying all your bills on time and lowering your credit usage rate. This could help you improve your score and make it more likely that you will be approved for a loan on your own or made an offer with better rates and conditions. If you prefer, get more tricks for raise your credit fast with our special guide.

Get a loan that builds credit

If you don’t need the money so urgently, you could opt for a credit-building loan. These types of loans are usually for very small amounts of money and most of them are available online; but the good thing is that they will report your payments to the main bureaus in the country, such as Equifax, Experian or TransUnion.

Yes indeed: Remember that with a loan of this type, the lender will not give you access to the money until you pay the full amount of the loan. As we said before, the plus point is that each payment will help you to raise your credit score. Thus, you will be able to apply for a personal loan without a co-signer in the future.

Keep reading: How to get a personal loan without a co-signer

Ask for a smaller amount of money

Reducing the amount of your application could increase your chances of approval. Lenders may be more confident in your ability to pay a lower amount after looking at the basis of your income and credit history.

Apply for a secured loan

You may have a higher chance of approval if you apply for a secured personal loan. What can you use as collateral? Your savings account or a certificate of deposit. As the lender will perceive a lower risk, you will be able to access more money or a better rate.

Note: If you don’t pay the credit on time, the lender could take your collateral as payment.

Remember: Secured loans are not necessarily car title cash loans or reverse mortgages.

In short, should you take out a loan with a co-signer?

Before asking someone to sign a loan with you, consider the alternatives. If you think you can’t wait to raise your credit score or apply for a loan to help you build it, then try to choose the right person. A perfect co-signer should be someone close to you who has a high enough credit score and financial strength to sign with you without fear of repercussions.

Remember that, in this case, the deal is that you pay the debt on time and without delay. So you want to make sure you 1) ask for an amount you know you can afford, 2) take a good look at the APR and related fees, 3) ask if there are any prepayment penalties, and 4) verify that your income is strong enough. enough to cover the amount of monthly installments.

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