Monday, 13 November 2017

Getting a personal loan can be a smart option for someone who needs money to pay for urgent home repairs, consolidate high-interest debt, or simply gain access to cash.

If you're concerned about whether you could qualify for a personal loan on your own, getting a co-signer could help your chances. When someone co-signs a loan with you, they essentially tell the lender, “I will make the payments on the loan if the other borrower cannot."

Leslie Tayne is a New York attorney who focuses on debt resolution and financial management. “Anyone with a poor or insufficient credit history may be required to have a co-signer on a loan. In many cases, teens and young adults who are building their credit from scratch will end up having their parents co-sign on a loan or credit card," Tayne says.

Co-signing a loan can affect the credit scores of both signers. “If the main borrower makes late payments or defaults on the loan, this can negatively impact both of your credit scores. On the other hand, if the borrower makes on-time payments for the duration of the loan, you could both see a boost in your scores," Tayne says.

And once a person co-signs a loan, it's unlikely they can take their name off the loan before it's paid in full. “In cases where they can be removed, it can be a lengthy process and is typically only allowed after they have been on the loan for a while and the main borrower has had a history of making on-time payments," Tayne says.

Of course, when you take out any kind of loan, you plan to pay it back. But repayment takes on even greater importance when someone else's credit is at stake. You might want to try to accelerate the payments to get the loan paid off as soon as possible Tayne says.

“You don't want to leave them on the hook for the loan or have them negatively impacted in any way. At the very least, you'd want to ensure you can afford the minimum monthly payment," Tayne says. 

Should you agree to co-sign a loan?

If you've been asked to co-sign a loan, you need to fully understand the implications.

“It is extremely important that you as the co-signer trust the person who you are co-signing for," Tayne says. “Even if the person you are signing for is trustworthy, unforeseen circumstances such as death, serious illness, job loss, or other financial hardship can happen to anyone. You must be accepting of the fact that you may become responsible for the loan at some point."

Both the borrower and the co-signer could be subject to having assets frozen and wages garnished if the debt isn't repaid. And defaulting on the loan will likely have a serious negative impact on both borrowers' credit scores.

“Failure to pay by either one of you may even result in collection activity, including lawsuits," Tayne said.

She added that assuming any debt, including taking on a personal loan, can affect your debt-to-income ratio. So if you plan on shopping for your own loans or credit in the near future, co-signing a loan with someone else might not be in your best financial interest.

Before taking out a loan or agreeing to be a co-signer, it's smart to check with a trusted financial adviser to see what's best for your situation.

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