Cosigning is not a new thing in the lending arena. It offers an opportunity to financially responsible individuals to assist others. However, cosigning a loan has its benefits as well as risks. It is therefore important that you understand what you are getting yourself into before cosigning loans for people you trust.
So what is cosigning and who is a co-signer?
A cosigner is an individual who takes the responsibility to pay a given loan if the borrower defaults. Usually you can cosign bad credit personal loans with someone if he/she has a bad credit rating/history, has no established credit, has a high debt to income ratio and does not meet the minimum income needed for certain loans. In addition, people who are self-employed and tend to change jobs frequently may also need the help of a cosigner to qualify for a loan.
Using a cosigner has been justified by many as a better and simple means to a greater end. For example many have secured private student loans, mortgages, and credit cards just with the help of a cosigner.
The Responsibilities and Obligations of a Cosigner
· Cosigning is a serious relationship that binds both the primary borrower as well as the cosigner to the financial institution. The major responsibility of a cosigner is to take up the responsibility of paying the loan in case the primary borrower defaults.
· Do not however confuse a cosigner with a co-borrower. A co-borrower has an equal obligation to paying the loan, a cosigner on the other hand only pays if the loan is defaulted. A cosigner also has no interest whatsoever in the ownership of the property for which the loan is being applied.
· As a co-signor you need to be qualified for the loan. You are also expected to sign all the loan documents as well as the promissory note.
· If both the borrower and co-borrower default, the monthly contributions are shouldered by the co-signer. As a cosigner you should be ready to receive all the monthly statements of the loan. Also in case of a foreclosure it will be indicated on your credit score.
· A co-signer is also responsible for the administration of the loan and has to ensure all payments are made as scheduled.
Is it Possible to Reverse Your Status as a Cosigner?
Agreeing to be a cosigner is a very crucial decision which unfortunately cannot be reversed. If you regret having acted as a cosigner in a loan, there only some simple measures you can take to ease the situation but you cannot take your name off the debt.
Ensure the terms and conditions when you apply for bad credit loans online that have to do with the loan repayment are clear to you. For example know all the parties involved, as well as how the lender intends to handle financial issues like missed or delayed payments.
Secondly, be active in the management of the loan account. The lender should be ready to accept in writing that they will make you know whenever the borrower misses a payment. This will give you an easy time if it becomes inevitable that you repay the loan. This is because making monthly payments is much easier compared to lump sum payments. This is why constant monitoring of the loan repayment is very necessary.
How Cosigning Affects Your Credit Status
· A cosigned loan appears on your credit report just as it does on the borrower’s report. Also whenever monthly payments are made, your credit information gets the necessary update. It is not easy for you to know if the borrower has missed payments for five months, if you do not follow it up. On the contrary creditors who view your report will automatically know that you are five months behind payment.
· The amount of the loan affects your ability to qualify for future loans. Since the amount of the loan you cosign is reflected on your credit report, it determines the amount of loan you are qualified to apply for.
· On a positive note, if the borrower makes payments as expected then cosigning does not harm your credit score at all. Instead it adds a lot of positive information to your credit score.
· Note the credit bureau uses the information on your credit report to calculate your total credit rating. A higher credit rating increases your chances of getting a loan while a low rating does the opposite.
Benefits of Cosigning a Loan
· Builds your credit if the loan is paid on time
· Gives you the opportunity to help out someone
Disadvantages of Cosigning Loans
· Gives you a higher debt to income ratio
· Can hurt your credit rating
· Strains the relationship between cosigner and borrower
· You cannot take your name off the legal documents even if you regret cosigning the loan.
Cosigning loans can be good or bad depending on how things go. The decision solely lies on you to either accept or refuse to cosign a loan. It is therefore important that you understand the benefits as well as risks involved in cosigning a loan. Ensure the borrower is someone you trust and that you are in a position to repay the loan in case the borrower defaults.