One of the banking jobs is lending. The interest of these financial institutions is that as many people as possible borrow money from them. That’s because banks charge interest and fees for this concession and thus earn profit.
That doesn’t mean that everyone who applies will get a loan. Lenders may have fairly strict criteria for applicants. You can check out lånpådagen.org and get more information about these requirements. So, in principle, there are many reasons why lenders can reject your application. Still, if they consider you worthwhile, they can borrow money under certain conditions.
For example, banks can suggest co-signing. You might need an explanation of this arrangement, how it benefits borrowers, and when lenders may recommend it. So, whether you need a co-signer, or someone asks you to co-sign their loan, this article will answer most of your questions about this type of financial arrangement.
What Is Co-Signing?
Co-signing is a way to borrow money from a bank or other financial institution and have higher approval chances. However, it requires someone to step up as a guarantee, i.e., someone who will be responsible for the loan’s repayment. If the borrower fails to make the payments, the co-signer must do that.
People who otherwise would not be eligible because they have bad credit or lack a steady income rely on this type of loan. So, it can be a good option when someone wants to do a favor to a relative or friend and help them improve their financial situation. Still, taking on this responsibility may be risky on both a financial and personal level.
Before applying, you should carefully review your credit history to ensure you can take the loan risk. Also, you should consider whether you really need to borrow money. Unless you have a steady source of income, you should avoid borrowing and spending more than you can afford. Failing to meet your obligation can put both you and your co-signer at financial risk.
However, if you know you can pay off the loan, you can apply for a co-signing loan. This option can be a good fit if you can provide an honest assessment of your needs to the lender and the person who will be your co-signer.
Benefits for Borrowers
Before signing up for a loan, you should consider whether co-signing is a good option. While the co-signer is not the debt signatory, they will be responsible for making any missed payments. If the primary borrower defaults on loan repayment, the bank will contact the co-signer to make up the payments.
Adding a co-signer to a loan increases the chances of approval. Both signers’ creditworthiness is considered during the loan application process. In most cases, the primary borrower is responsible for the loan repayment, while a co-signer is there just in case. But if they can’t make the payments, the co-signer is responsible for the debt.
This arrangement can benefit you as a borrower if you find yourself in a current problem. In that case, the co-signers can accept repayment of your debt for a while until you stabilize financially. It would be best to repay their expenses as soon as possible to preserve their credit rating. Co-signing doesn’t carry any risk for the co-signer only if the debt installments are paid on time.
Who Can Be a Co-signer?
Asking someone you trust to be a guarantee for you is a great idea, but who can be a loan co-signer? Your first stop will probably be family, friends, or anyone you trust. As seen here, that’s not the same as having a co-borrower. You can ask them for this favor, but they will have to give this decision plenty of thought before accepting.
That can be a tough decision, so give your friends or family time to think about it. But, even if they accept this responsibility, that doesn’t make them suitable for this financial arrangement. That’s because, besides goodwill, co-signers must meet certain conditions.
First, the co-signers must have good or excellent personal credit. Also, they need to be financially stable, with a low DTI ratio. It means a steady income not overburdened with debts. Credit score requirements vary by lender, but generally, the co-signer must have a credit score of at least 670.
Most people co-sign loans hoping the borrower will be able to pay them off. But things happen that don’t work out as planned. For example, borrowers can end up in an unenviable situation, such as losing employment, divorce, or unexpected illness. These unexpected events pose real risks for both parties in this financial arrangement.
It’s essential to understand the legal responsibilities involved. A co-signer is legally obligated to repay the loan if the primary borrower can’t. Also, consider the totality of the borrower’s financial problems. For example, their lifestyle and spending habits may indicate a pattern of bad decision-making. So, if the borrowers seem unreliable, don’t accept this responsibility.
But some things that may cause missed payments are unexpected and unavoidable. For example, death or medical interventions can happen to anyone, causing unforeseen costs and temporary inability to pay off the loan. In this case, a co-signer will have to be of good credit to take over repayment, at least for a while.
A co-signer’s debt will eventually appear on the borrower’s credit report. Still, this is not to say that this loan is not good for your or their credit. If you, as a borrower, settle your debts on time, neither you nor the co-signer will have a problem. In fact, regular settlement of financial obligations can improve your credit ratings.
Risks of This Arrangement
If you need a co-signer, find someone who trusts you. For example, ask friends or relatives and explain your reasons for taking a loan. Also, prove to them that you are accountable for your obligations and will settle your debts on time during the loan lifetime. That way, the co-signer will not be at risk.
If you are the co-signer, you’ll be held responsible for the loan if the borrower defaults. You may end up paying late fees or repossession costs. Also, the borrower’s loan debt will affect your DTI ratio, and if you fail to make payments, it can lower your credit score. That will affect your ability to apply for any financing when needed.
Moreover, being a co-signer limits your borrowing power. When evaluating your debt-to-income ratio, a potential lender may shy away from you if you’ve co-signed a loan. So, you should avoid these arrangements if you plan to take a loan or apply for some other method of financing in the recent future. That way, your friends and relatives will understand your reasons for saying ‘no.’
Can You Take the Risk?
Co-signing a loan is a risky move and should be done when it’s necessary. It carries certain risks for everyone who takes on this responsibility. Plus, it can ruin your relations with close people. So before asking a friend or relative for this favor, make sure you both understand what you’re getting yourself into.
Another thing to consider is the relationship between you and the borrower. If you’re co-signing for a loan with your friend or family member, that can affect your relationship. Depending on your relations, you may feel awkward seeing each other as you know this financial arrangement ‘links’ you somehow. So, you should accept it only if you have great trust and respect.
The parties included in co-signing should understand its risks and benefits. Don’t accept this obligation at all costs. Even though your relationship with the borrower is strong, you should consider the consequences of your involvement. So before signing anything, it is worth your time to learn about the pros and cons of this deal.