When you or someone you know are having trouble getting a loan it can be very advantageous to you or someone close to consider co-signing. However, there are some serious matters to consider when choosing to go this route as well. When determining if getting or being a co-signer is right for you, please consider the following benefits and drawbacks.
- Qualification: Sometimes a borrower is not going to qualify at all. By including a co-signer, the borrower is able to access a loan.
- Lower interest rate: Consumer loans, such as auto loans, personal loans, and credit cards, tend to consider the highest credit score available when setting the interest rate. If a primary borrower has someone with a higher credit score as a co-signer, it can significantly reduce payments and/or total interest charges.
- Building credit: Although there are other ways to build credit, any time a loan is applied for and paid on time it builds credit history, which can in turn improve a credit score. The next time a primary borrower applies for a loan, it may be easier to do so without a co-signer.
- Co-signer is responsible: The reason why a primary borrower may be able to qualify for a loan with a co-signer when unable to do so alone is because the co-signer is taking on responsibility as the borrower if the primary borrower fails to pay. Because the co-signer has a higher score, this person frequently has more to lose than the person receiving the loan. It is not only the score that can be impacted, but potentially a co-signer’s assets. This is not a decision to be taken lightly.
- Can strain relationships: Chances are good that someone you ask to be a co-signer is a family member or a close friend. Consider co-signing to be a form of lending money. If you would not ask to borrow money from this person (or, as the co-signer, if you would not lend money to the person asking), then it is probably better to consider your alternatives. As a co-signer, the piece of wisdom that has preserved so many friendships applies: Don’t lend money to a friend unless you are comfortable never seeing it again.
- Can cost the co-signer money: If the primary borrower fails to make payments, it will fall to the co-signer. If the co-signer cannot afford payments, then it will amount to a default for both the primary borrower and the co-signer, impacting credit and future loan opportunities. If you are a co-signer, ensure you have money set aside to make loan payments if needed. If you cannot afford to make the loan payments, understand the consequences of failure to pay.
While co-signing can be a great way to access a loan, or access a loan at a better rate than you otherwise could, it is not a decision that should be taken lightly. If you enter into a co-signer relationship with someone with open eyes, it can be highly beneficial to the primary borrower. On the other hand, if you would not be comfortable borrowing or lending money, or if the co-signer cannot afford to make payments, it could be worthwhile to look for other opportunities, such as credit building loans, rather than ask someone to shoulder this new responsibility.