Everything You Need to Know About a Co-Signer
A co-signer is someone who signs for another person's debt with the understanding that he/she will be legally responsible for the debt in case the borrower defaults. A co-signer is usually one of the borrower's immediate family members or any trusted friends. The reason for that is, 'co-signing' comes with certain risks. The main risk is that if the borrower fails to make the loan payment/payments, the co-signer will have to make the payment/payments. A person will act as a co-signer only if he/she believes in the borrower's ability to pay the debt back.
The reason for the need of a co-signer
The role of a co-signer comes into play when the borrower wants an immediate loan, be it a short term loan or a long term loan, but does not have the ideal credit score to get it. For example, if your credit score is not good, then most of the lenders will deny you a loan (except in case of loans such as payday loans, installment loans, and lawsuit settlement loans). Even if a loan is approved, the interest rate will be high. In such a scenario, what a borrower can do is take the help of a person who is willing to co-sign the loan for him/her. Now, the credit history of the co-signer matters, only a person with an impeccable credit score can co-sign a loan. The lenders will then have no problem in approving the loan because the co-signer with the good credit is literally telling that he/she will pay back the loan amount if the borrower fails to pay the amount back.
Some of the other situations when you need a co-signer for taking a loan include, you are self-employed and have variable income, you do not have an established credit, your debt-to-income ratio is very high, and so on.
A private student loan usually requires a co-signer (federal ones do not). This is mainly because there is no 'earning or income' in the picture, hence the lenders will require someone with a steady income and a good credit history to take responsibility for the loan. Now, once the student graduates and get a job, he/she can legally release the co-signer from the agreement. Releasing the co-signer can also be done in the case of other types of loans as well.
Considerations for a co-signer
A co-signer must fully understand the responsibility that he/she is undertaking. Once you co-sign a loan, the responsibility to pay it back rests with you as well. In case the borrower fails to pay the loan back, you will have to pay the full loan amount back. This includes the fees, interest, and any other associated expenses. If you fail to do that, the lender can resort to the same collection methods that can be used against the borrower, against you. This includes garnishing your wages or suing. Hence, co-sign a loan only if you trust the borrower. Also, be sure that you have the ability to pay the loan back if the borrower defaults. Keep in mind that your credit score is also on the line.
Considerations for the borrower
No matter what the reason is for taking the loan, be it for education or to pay for an emergency power bill or to improve your credit score, understand that the person who is co-signing the loan for you is taking a big risk and a big responsibility for you. He/she is doing you a favor. Respect those facts, and diligently make the payments.
Getting the help of a co-signer is a practical way of securing a loan if you are unable to get a loan on your own.