Understanding Co-signed Loans

Because of the numerous dangers that can result from co-signing a loan, both the primary borrower and the co-signer must be completely aware of the possible consequences of co-signing. Although the advantages might seem clear and best for the short-term, there can be harmful effects in the long run.

Co-signed loans can help borrowers, who would not normally be eligible for a loan, build their credit. These borrowers are individuals who have small or no credit at all, who have bad credit history and credit score, who have high debt-to-income ratio, or who are trying to buy something more than their authorized loan amount.

For these types of borrowers, a co-signer, or guarantor, might be expected by the lenders of the loan. Basically, the co-signer guarantees that payments will be made on time by the primary borrower until the maturity date of the loan. Otherwise, the co-signers will be held responsible for paying the outstanding debt.

However, it will be troublesome for borrowers who only have co-signed credit and never purchased anything without help.

As borrowers get high credit score through co-signed loans, they gain confidence to independently apply for a mortgage or loan. In spite of this, there might still be harmful effects in applying for loans.

There might still be some reluctance on the part of the lenders to give a new line of credit to borrowers with a minor credit history. For instance, a fully paid co-signed auto loan might not convince the lenders that the borrower is trustworthy for new credit.

Besides co-signed-loans, another option for individuals who have poor credit history and credit score is a secured loan. As collateral for a loan, secured loans require borrowers to present an asset, for instance, a house or a car. If the borrower fails to pay the secured loan, the lender can take legal action and acquire the asset’s collateral value in order to regain the loss from the unpaid loan.

It is less difficult to get approval for a secured loan than a co-signed loan because of its collateral feature. In addition, co-signed loans will not appear in the borrower’s credit report, therefore, not giving a negative impact to the lenders.

When deciding whether to take a co-signed loan or a secured loan, the borrower must take into consideration both the short-term and long-term consequences.

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