Co-signing loans is a common practice in the world of finance. In fact, it is an opportunity for someone with a better credit history to help another person who is struggling to get his finances back in order. However, this practice is rather between friends and family members since it ncissite a very good relationship of trust.
Opinions about co-signing a loan vary from person to person. And that’s normal. If you think about it, by co-signing, you put your name and credit history at stake, and you are now responsible for this loan as if it were yours.
Sometimes, because of a bad credit history, some people can not qualify for a loan they want. That’s when the co-signer comes in. The co-signer uses his good financial reputation to help the other person get his loan.
The positive aspects of co-signing
1. Co-signing helps a friend or family member get financing
The reasons for asking are many and the majority of them are good: tuition, transportation, housing. If you take away some people’s ability to have a loan, their options become very limited. Seeing his loan application being rejected is a very common reality. However, a co-signer could solve this problem. For example, by making a loan, you can help a loved one pay for school fees, buy a safe car, or even move to a better place.
2. It improves the credit history of both people
In order to improve your credit rating, you need to get a loan, something that can be difficult for some people with difficult financial backgrounds. The co-signer is then beneficial. Someone with a good credit history could co-sign the loan, which will not only improve the credit rating but also the creditworthiness of the person in need. Moreover, as the co-signer is attached to the first as the main signatory, his credit score increases with each payment made on time.
3. Better interest rates
Unfortunately, people with a difficult financial history have to pay higher interest because, in the eyes of creditors, they are considered at risk. On the other hand, by having a consignee with a good credit history, the person will be able to benefit from the co-signer’s credit score and thus obtain better interest rates.
4. This avoids the attractive scams of creditors
By having a consignee, you avoid dealing with creditors whose only intentions are not to help you, but to take advantage of your bad credit history. These types of creditors are looking for vulnerable people to take advantage of their lack of knowledge and thus impose extremely high interest rates on them. When a person with a good credit history cosigns your loan, this allows you to get a quality loan from an honest creditor and that will offer you a fair interest rate.
The negative aspects of co-signing
1. You will not get a material reward
This may be the only reason why co-signing a loan or mortgage could be a bad idea. Indeed, you will not have any material benefit following this gesture, you will not be able to drive the car that the person has procured nor live in the house bought, but you will be responsible for the payments. If the person for whom you have co-signed is no longer able to pay, it will be up to you to pay.
2. You are responsible for the loan
If you cosign the loan with someone, you are technically the only reason that this person gets the loan. Your good credit history is why your friends or family member with bad financial history is able to get the loan. If the payments are no longer made, the person with the good credit history, ie you, will be held legally responsible for repaying the remaining debt.
3. You may be refused for a loan in the future
By co-signing a loan today, you may be unable to obtain a loan in the future. Think carefully about your future before signing a loan. You might not think of having a loan soon, but the reality is that you never know what can happen. You will not want to be rejected when you need it.
4. You will have to make the payments
Prepare to make payments at any time. Given that you are responsible for the loan now, you must be prepared to make payments to protect your credit history. Put money aside in case the other signatory is no longer able to fulfill its commitments.
5. You will have to watch the payments
Even if your friend or family member claims to be making payments on time, you need to check everything yourself. Failure to check the regularity and accuracy of the payments made is simply not an option. You will have to treat this loan as another monthly bill, so stay organized and ready to pay at any time.
Wanting to help our friends or family is never a bad idea. However, when seeking your financial assistance, think carefully about the consequences. Depending on the situation, the positive aspects of co-signing might outweigh the negative aspects, but the opposite is just as possible. The best solution for both parties is to understand what the co-signature actually implies. Thus, by analyzing the situation carefully, you will be able to say yes to your friends without fearing the impact on your financial life.