Getting a Loan With a Co-Signer
If you do not have an established credit history applying for a loan with a co-signer may help you get approved. Co-signers are used to strengthen a weak application and make it more likely to get approved. Co-signers can be a parent, a spouse, a friend or any other eligible adult who has good credit and meets other qualifying criteria. If the primary borrower does not pay, co-signers are equally responsible for the loan, up until it is paid out. Applying with a qualified co-signer not only increases your chances of approval, but also may make you eligible for lower rates and fees. It is important to note that a co-signer will not make a bad deal good. If your FICO score is very low, or your debt service ratio is too high, the lender will not approve your loan just because there is a strong co-signer. However if you have no credit history, but everything else is good, a co-signer will compensate for that one shortfall.
Agreeing to co-sign on a loan is a big commitment and risk for the co-signer and should not be taken lightly. If the primary borrower is late or misses any payments, the co-signers credit rating will be damaged. If the co-signer has put up collateral to secure the loan he or she could risk losing it if the loan goes into default. Additionally, loan default could cause the co-signer to be subjected to higher interest rates the next time they require credit. If the primary borrower begins to miss payments the co-signer may be forced to cover them or face further damage to their credit score. The lender may attempt to collect delinquency from the co-signer before going after the primary borrower. The lender just wants their loan paid and if it is easier to pursue the co-signer then that’s what they will do this.
Another drawback to loan cosigning, is that it can interfere with the co-signer’s ability to get their own personal loan approval for a new car or a home loan. The payment amount of the co-signed loan is included in the total amount of debt payments lenders use to determine if a new loan is affordable.
Once a cosigned loan is approved and issued, lenders are not eager to remove co-signers from the loan. After a significant period of time, if the primary borrower can show that they can qualify for the loan without a co-signer then there may be the opportunity to rewrite it.
Adding a co-signer to a loan application has it advantages and its disadvantages. Consider these carefully before making any lasting decisions.
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