Consumers use personal loans to fulfill many different goals, but what happens to those who can’t get approved? Although building up your credit is one viable option, you might not have the time to wait around for your score to increase. Asking someone to co-sign your loan might help you take advantage of lending more readily.
What Does a Co-signer Do?
Personal loans constitute a form of legal contract where you, the borrower, acquire money from a lender and agree to pay it back according to their terms. Before agreeing to loan you money, however, lenders evaluate factors like your credit score and lending history to determine whether you’re a safe risk.
When lenders decide that the chances of you failing to pay them back are too high, you may still be able to obtain a loan with a co-signer. Co-signers, or guarantors, are financially independent third parties who also commit to repaying the loan. According to the Consumer Financial Protection Bureau, many borrowers rely on family members to fulfill this role, but you can ask anyone who possesses the necessary financial resources to step up to the plate.
How Does Lending Impact Co-signers?
In addition to being on the hook for the loan’s remaining balance if you default, your co-signer also bears some of the potential for credit problems. For instance, you missing a payment will have an adverse impact on their credit score as well as yours. If you fail to deal with the loan responsibly and cause your co-signer a lot of financial trouble, it might become more difficult to maintain a healthy relationship with them.
Co-signers are also responsible for various incidental fees. For instance, they may be assessed late penalties and collection costs. In cases where loan accounts enter collections, creditors may skip trying to hunt down the borrower and go straight to the co-signer by garnishing their wages or taking them to court instead. The Federal Trade Commission advises that those considering acting as co-signers ensure that they can pay the loan before getting involved and ask creditors to notify them when borrowers aren’t keeping up their end of the deal.
How Does Co-signing Function in the Real World?
Even in light of these potential downsides, co-signers continue to help thousands of consumers take out personal loans each year. Although it’s ultimately up to the lender whether they’ll permit co-signing, these loan programs can facilitate everything from personal luxury purchases to business investments. Loan providers that accept co-signers may include:
Banks and Credit Unions
Some banking institutions that provide personal loan products also let borrowers bring on guarantors. Although most of these programs require you to fill out extra forms, they can be effective ways to obtain capital at relatively low interest rates.
Some borrowers seek funds from online lenders, but co-signer clauses may not be quite as common with these entities. It ultimately depends on what kind of creditor you choose and the products that they offer. You may even discover that some lenders grant you a discounted interest rate if your guarantor has excellent credit standing.
Housing and Education
Although personal loans don’t usually apply to these fields, landlords and property sellers are known to accept co-signers. As the Department of Housing and Urban Development notes, these loans are distinct from those that involve co-borrowers who receive some stake in the property, such as having their name added to a title or rent agreement. Co-signers only get the responsibility.
Higher education loans are also good examples of how co-signing typically works. Students who want to pursue academic achievement in colleges and universities may broaden their options by taking out loans with their parents as guarantors.
Should You Work With a Co-signer?
Asking someone to guarantee your personal loan could potentially make a big difference in your financial situation. Of course, your acquaintance or relative might not want to get involved at first, but if you approach the matter responsibly and respectfully, you’re more likely to get a favorable answer. For instance, presenting your would-be co-signer with a well-considered plan for how you’ll repay the loan and keep them out of credit trouble might just persuade them to help.
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