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The information on this site does not modify any insurance policy terms in any way. To put it simply, the biggest difference between a co-borrower and a cosigner is the degree of investment in the loan.
A cosigner agrees to take responsibility for repaying a loan if the primary borrower misses a payment. The cosigner typically has better credit or a higher income than the primary borrower, who might otherwise not get a loan application approved without the help of a cosigner. If a young person without established credit wants a personal loan to start a business, for example, the bank might decide that granting the loan is too risky unless someone with better credit agrees to share legal responsibility for repayment.
Cosigners typically have a close relationship with the primary borrower. Lenders are likely to consider legal action when the debt is between 90 and days past due. The borrower may start out making full, on-time payments toward the loan or credit card with good intentions. But financial and personal situations change. Children who run into trouble with payments toward a co-signed credit card or car loan may hide the shortfall from their parents until the situation worsens, ruining trust in the relationship.
Couples going through a divorce often have to deal with the financial consequences of a co-signed car or mortgage, says Urmi Mukherjee, a certified financial counselor at Apprisen, a nonprofit financial counseling agency. In those cases, it may be tough to persuade one spouse to pay his or her share, especially if the spouse has moved out of the house or given up the car.
If issues arise, removing yourself as the co-signer is not always a straightforward process. Refinancing the loan is one way to have yourself removed, provided that the primary borrower can now qualify for a new loan on their own.
Student loans or credit cards typically require a certain number of on-time payments before the lender will reassess the primary borrower to see if they can make payments on their own. The upside of co-signing a loan for someone is obvious — you can help them qualify for college tuition, a credit card or some other financial product they could not get on their own, or save them interest with a lower rate.
When someone is new to credit or is rebuilding their finances, having a co-signer with a good score and an established credit history is powerful. Being a co-signer can build your credit in these ways:.
As long as payments are made on time, it adds to your payment history. However, if you have a good score and well-established credit, the effect may be small compared with the danger to your score if the borrower doesn't pay.
You might get a small benefit if your credit mix improves. It's useful to have both installment loans with level payments and revolving accounts like credit cards. The person you co-signed for can build their credit in these ways:. It can help them qualify for credit they otherwise would not get, boosting a thin credit file.
Making on-time payments on the account builds up a good payment history. Make sure they fully understand the favor that you are doing for them and the responsibility you are taking on for them. Co-signing is something you should both take very seriously. See current personal loan rates. But is that enough? Only you can decide, based on your knowledge of yourself and the one you love enough to lend your good credit. If you have grounds to suspect that person might let you down, say no to cosigning.
Might your friend or relation avoid seeing or speaking to you if he or she feels guilty about the damage to your credit? Might you end up feeling resentful every time you see a social-media post where that person you cosigned with is out in a bar, or in a restaurant, or taking a weekend break or vacation? You may well still think that agreeing to be a cosigner is the right thing to do. Q: A friend of mine has had some financial problems in the past, but now has a good-paying job and has gotten his budget under control.
He needs a car loan but is having trouble qualifying because of his past history. He asked me if I would lend him the money myself or cosign a loan with him. Which do you think would be better? A: If you cosign a loan, you are agreeing to be fully responsible for the loan if your friend defaults. So, you could be out the amount borrowed, plus any interest and penalties resulting from late payments. Beyond that potential cost, your credit rating could be affected simply by taking on this obligation, and it would certainly be affected if your friend defaults and you have trouble paying back the loan.
In contrast, there are a couple of advantages to lending him the money yourself as opposed to co-signing a loan. Both put you in the position of potentially losing the principal of the loan, but at least if you made the loan yourself, you would not be on the hook for any interest or penalties. In fact, a potential upside is that you would presumably be charging your friend interest, and with interest on savings accounts and other deposits near zero, this could be a way of earning a little more on your money — if everything works out.
Of course, personal loans are also much more risky than savings accounts, so you should take that into consideration when deciding what interest rate to charge your friend.
Basically, his inability to qualify for a loan on his own tells you that lenders consider him a high risk, and friendship or no friendship, you should view him the same way. You should charge an interest rate that takes into account the amount of risk you are taking. If you decide to make the loan, you should set up a formal loan agreement and payment schedule. This should not be treated casually because you are friends. In fact, one potential problem of making the loan yourself is that your friend might take an obligation to a professional lender more seriously, while he might be tempted to try to appeal to your friendship if he has trouble making payments to you.
Of course, there is a third option here: just saying no.
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