Co-signing is used to help people who cannot qualify for a loan on their own. Simply put, it’s a show of solidarity and trust for individuals who lack the necessary credit history, income, or dependability to obtain a loan.
However, while it appears that co-signing is a mutually beneficial activity, there are some considerations that individuals, particularly the co-signer, should be aware of before entering into co-signing arrangements. Let’s look at the concept, risks, benefits, and maintenance guidance that come with co-signing.
What is co-signing?
According to the definition of each word, co-signing is an agreement between a borrower with a history of missing loan payments and a person who will share the burden of the loan in case the borrower misses it. So, if they ask for a co-signer, it could lighten their financial burden of repaying the loan.
Co-signers have to include their name, credit profile, and financial information on the primary borrower’s loan application to convince the lender that they are legally capable of accepting responsibility for the loan amount, as well as any additional fees that the borrower might have to pay. As a result, lenders will approve the loan if the co-signers have a good financial profile.
Why should you do co-signing? What should I be concerned with?
For the co-signer
It sounds reasonable, considering that taking care of your own life is already difficult. Although it may not provide much benefit to you as a co-signer, having a good credit history for repaying your loan and other people will make your credit history stronger, as long as payments are made on time.
However, it needs to be emphasised: don’t expect much, because the main thing about co-signing is to help the borrowers (who could be your loved ones) by giving them access to lower interest, teaching them financial responsibility, rebuilding their credit, and, of course, strengthening your relationship with the borrower.
Nevertheless, before deciding to take co-signing, as a co-signer, aside from having a strong credit score, be sure to think twice to get an accurate picture of what co-signing will mean to you:
- Are you able to afford to pay off the debt? Are you even sure that once the borrower defaults, it will not hurt you financially?
- Do you already fully understand the terms of the co-signing? Make sure you get copies of all the loan paperwork in your hands.
- Are you sure your relationship with the borrower is good, now and in the future? The key to co-signing is communication. Once scattered, your money’s gone, and it will continue to languish because you are the person who will continue to take responsibility for this loan.
If you have already asked yourself these questions and have checked that your financial condition is good in the current and future, then you can take co-signing. You also need to remember that your credit might get a small benefit if the loan improves your credit mix, so it is recommended that you have both instalment loans and revolving accounts like credit cards.
For the borrower
Of course, taking a co-signer is necessary for individuals who can’t qualify for the loan by themselves. When you have thin creditworthiness or are rebuilding your credit, you might need a co-signer. Here are the benefits of having one:
- Loans for necessities, like education or a home, are guaranteed by someone you have been close to. Co-signing may be the activity that will make you more disciplined while strengthening your relationship with the co-signer.
- You have the opportunity to rebuild your credit history with their high profile.
- You can get access to lower interest rates and more favourable loan terms, which can save you money over the life of the loan.
While co-signing can lighten your burden to rebuild your credit history, you have to consider that there are risks that may affect you in the future.
- Once you default or make late payments, both your and your co-signer’s credit scores will be negatively impacted. Once this happens, the co-signer will have higher interest rates on loans, and your relationship will be strained.
- If you default and the co-signer is unable to cover the payments, you will be trapped in legal consequences for both of you.
Are you ready for co-signing?
While co-signing may be a way to assist borrowers in going through financial strains, it also demands careful consideration for both parties, as the drawbacks are quite healthy.
For borrowers and co-signers, it is highly recommended that they be guided accordingly before going to a registered money lender. They should be aware and aligned regarding its implications, the terms and conditions, and the risks that may affect them in the future.