When a consumer applies for credit, either through a loan or credit card company, their own credit history is examined. If the borrower has bad credit or no credit at all, their application may be denied. This situation is not uncommon for young borrowers or an individual with past credit problems. How does one get approved for credit to establish or rebuild credit if they are ineligible for a loan on their own? Here we look at the role of a co-signer and whether or not this option is the right move.
What Is A Co-Signer
A co-signer may be required to facilitate the approval of a loan for a borrower who is ineligible on their own. When a person agrees to co-sign on a loan application, they are essentially agreeing to repay the loan if the original applicant is unable to do so. By requiring a co-signer, the lender reduces the risk of default.
Benefits of Co-Signing
The benefits of having a co-signer are obvious. The loan applicant is approved for credit which otherwise would have been denied. When managed correctly, this loan opportunity could be the step needed to establish credit and overcome a financial hardship. The benefits for the co-signer are less obvious. As a general rule, there are more risks associated with co-signing a loan than benefits, unless you are helping a close family member establish credit which will improve their chances of being financially independent.
Drawbacks of Co-Signing
The main drawback of co-signing a loan is how this move will impact the credit of the co-signer should the original applicant default on the loan. As a co-signer, you are fully responsible for repayment of the loan and any mismanagement of the loan will have a negative impact on your credit. In essence, you are on the hook for repayment and your credit will take a hit if payments are not made.
Should You Co-Sign
If you are approached by a family member or friend to co-sign for a loan, it is important to think things over before making a final decision. Understand that by co-signing a loan you reduce your available credit should you decide you want to buy a home or car in the near future. The financial impact is important, however for many people this decision is more emotional. Should you agree to co-sign and find yourself suffering negative consequences as a result, the relationship with the borrower may be ruined for far longer than it takes for your credit to recover.