VSSigning a loan involves certain inherent risks. This is why you should only agree to co-sign a loan after you have exhausted all other options.
However, co-signing may be the only way to give a friend, family member, or other loved one the ability to access the financing they need. In this case, it is crucial to understand what rights you have as a co-signer and what responsibilities you will assume after signing the dotted line.
What is a co-signer?
Lenders look at a prospective borrower’s credit score, income and other factors to determine if they are a good candidate for a loan. If an applicant does not qualify on their own, they may be able to add a co-signer to the loan, depending on the lender.
A co-signer is someone who meets the lender’s qualification requirements and agrees to repay the debt if the primary borrower is unable to do so. Adding a qualified co-signer can help you qualify for many types of loans, including mortgages, auto loans, personal loans, and student loans. While almost anyone can co-sign a loan, most people ask a parent, spouse, relative, or friend.
When would you need a co-signer?
Many private student loan companies require students to add a cosigner because they don’t have the credit history to qualify on their own. If you’re self-employed and applying for a mortgage, getting a co-signer can help you get approved if you have less than two years of self-employment under your belt.
In some cases, having a co-signer can also help you get a lower interest rate than if you just had to apply on your own. In fact, you can’t get the lowest interest rates from the best personal loans unless you have a co-signer.
Not all lenders allow cosigners, so double check before applying. When you start a loan application, indicate that you will apply with a co-signer. The lender will then send them a request. They will likely need to include personal information such as income, work history, social security number, contact information, etc.
What does it mean to co-sign a loan?
Co-signing a loan is no small favor. This is a major request that has huge implications for the co-signer. When a person co-signs a loan, they agree to take responsibility for the loan if the original borrower stops making payments or defaults.
For example, if you co-sign a car loan for a friend and they stop making payments, the lender will sue you for the remaining balance. If you can’t afford to make the payments, you also risk defaulting and damaging your credit score. It will therefore be much more difficult for you to be approved for a loan, a line of credit or a credit card in the future.
Even if the borrower doesn’t default, co-signing can still impact your credit. Although you are not the primary person responsible for repayment, how quickly the borrower makes payments will affect your credit score.
Cosigner vs Coborrower
The main difference between a co-signer and a co-borrower is that a co-borrower is also responsible for repayment throughout the term of the loan and has access to the loan proceeds.
Co-signers, on the other hand, do not have access to assets related to the lending transaction and only have to make payments if the primary borrower defaults.
Rights of co-signers
Before you consider co-signing a loan, you should review your rights.
Co-signers do not have access to the assets attached to the loan
Co-signers are not entitled to loan proceeds or loan security. For example, if you co-sign a house, you are not on the deed and have no rights to the property. If you co-sign a personal loan, you cannot legally access these funds.
Co-signers can be removed from the loan
A co-signer release allows borrowers to remove the co-signer from the loan without refinancing it into a new loan.
Many lenders offer the release of the co-signer after a certain number of consecutive payments on time. The exact timeframe, however, will vary by lender. Some may only require 12 consecutive months of one-time payments while others require you to be halfway through the repayment term.
Only the borrower can request the release of the co-signer, not the co-signer. If you are interested in releasing the co-signer, read the loan agreement and review the requirements. Then contact the borrower and ask them to request the release of the co-signer.
Co-signers may face collections before the borrower
When you co-sign a loan, you legally agree to become liable for the debt should the primary borrower default. It also means you may face collections for the amount outstanding before the borrower, according to the Federal Trade Commission (FTC).
Responsibilities of the co-signer
Before you consider co-signing a loan, you need to make sure you know exactly what you will be responsible for.
Gather the information required to apply
Lenders require co-signers to submit their own individual applications. Make sure you have the required information and documentation at hand when you apply. Lenders typically require information such as a co-signer’s income, employment history, social security number, contact information, and more.
Potential debt repayment
The primary responsibility of a co-signer is to repay the debt in the event the borrower defaults. You may also become liable for penalties and late fees, depending on the borrower’s monthly payment history.
Monitor the loan transaction
The co-signer should monitor their credit report and ensure that the borrower makes payments on time and in full. If possible, see if you can get notifications from the lender, such as when a payment is overdue. This can help you stay on top of any issues before they snowball.
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