There is no denying the advantages of having a high credit score. It allows you to be entitled to credit cards, car loans, mortgage loans and other types of loans without problems, as long as you have an adequate income. Good credit also justifies a low interest rate, which means lower monthly payments.
While the loan officers fight for your business, they are not the only ones to take note of your solid credit. If you are financially responsible among your family or circle of friends, there is the possibility that someone will ask you to sign a loan.
Consigning is a common practice in the loan world and gives you the opportunity to help another person. But before accepting with enthusiasm to sign a loan, seriously consider the risks and benefits to determine if it is a good idea.
What is a Cosigner?
A co-signer is a person who agrees to pay a borrower’s debt if he or she defaults on the loan. The person who asks to sign a loan usually has a good credit score and a long credit history, which greatly improves the chances of the primary borrower’s approval.
Foreclosures play a valuable role in the credit world and, in the absence of co-financiers, many people would have difficulty obtaining credits for the first time. But despite the usefulness of this provision, the cosigners trample dangerous waters.
Reasons for a loan Cosign
Co-naming is not always a bad idea. In fact, there are a couple of valid reasons to sign a loan:
1. Help an applicant to get funding
When you buy a new vehicle or go to college, it is normal for people to take a loan. Take away the availability of loans and the options are limited.
Credit and loan wastes are a reality for people with poor credit history. But sometimes, creditors and creditors reconsider an application if there is a co-signer. Discovering an opportunity and giving a reference point can give someone the opportunity to get a reliable transport, attend school or move to a safe community.
2. Help a credit to build candidates
Getting credit is necessary to create credit, but unfortunately it is difficult for people without a credit history to qualify for new accounts. As a loan taker, you have a hand in helping another person establish or build a better credit score and credit history.
Reasons for not granting a loan
Unfortunately, the risks associated with the cosigning of a loan far outweigh the benefits. Before accepting the cosign, understand the possible dangers:
1. Increase the debt / income ratio
Your debt / income ratio is the percentage of your debts in relation to your income. To calculate your debt / income ratio (DTI), divide your monthly debt payments by your monthly income. For example, anyone who earns $ 6,000 a month and has debt payments of $ 4,500 has a debt / income ratio of 75%.
Unfortunately, many people fail to understand how cosigning affects their debt / income ratio. Being a cosigner is not a verbal agreement that creditors forget once a primary applicant acquires the loan. As a co-signer, you are tied to the loan. You are required to attend the closing of the loan and sign the loan documents.
The loan appears on your credit report, and the monthly loan payment factors in the debt / income ratio – regardless of whether the primary applicant makes the payment every month. Since you are responsible for this balance in the event of default, being a cosigner can reduce your ability to obtain new credits.
But this is not the only consequence of a higher debt / income ratio. Loan assignments can also lower your credit score because the amounts you have to pay represent 30% of your FICO score. So the more debt you have, the lower your credit score. Ideally, the debt / income ratio should not exceed 36%, as your credit score will decrease as your debt approaches or above this percentage.
2. You cannot remove yourself as Cosigner
The comparison is not something you only consent to for a few months. Once you accept this responsibility and sign the loan documents, you are tied to the debt for as long as it is due. You cannot deny or ask the lender to take your name off the loan.
However, in some cases, the lender may include a release clause of assignment in the loan agreement, which removes you as a co-lender once the principal applicant demonstrates a timeliness story. These clauses are common with student loans, but you can take a chance and request this provision from any lender.
Otherwise, the only way to remove your name as a cosigner is that the primary applicant refinances the loan and re-qualifies alone.
3. You could ruin your credit
There is nothing wrong with helping a loved one or a friend, but emotions should not guide your decision. There is a reason why this person cannot qualify for a loan alone. It is understandable if he or she does not have a previous credit history. However, if the person requesting a cosign has a history of loan insolvency or late payment of bills, proceed with caution. The story can repeat itself, in which case your score will suffer.
Remember, this loan appears on your credit report. Therefore, any delay or missed payment is indicated in the report. Seriously assess whether the cosigning is worth the financial and credit risk.
When Cosigning Make Sense?
Although there is no good financial reason to sign a loan, cosigning is ultimately a personal decision. In some situations, it is the means to a greater end, and your personal reasons for cosigning could overcome financial risks. For example, you could sign a credit card application or an apartment for your child to help him become economically independent faster.
Even cosigning can make sense if you do not plan to finance anything in the near future. Since this loan increases the debt / income ratio, you may find it difficult to qualify for a mortgage or a car loan of yours until the debt is paid.
However, for cosigning to make sense, honestly examine your financial situation to see if you can afford payments in the event of a default. If you can’t, don’t take the risk.