Loan co-signing can be a tempting way for borrowers with bad credit to get a great deal on a loan, if a friend or family member agrees to help.
Whether it’s a mortgage, auto loan, or a personal loan, co-signing offers a way for credit lenders to mitigate the risks of lending to an individual with poor credit – allowing those who may otherwise be ineligible for a loan to secure a great rate.
However, loan co-signing isn’t always a good idea. In this article, we’ll take a look at 5 things that borrowers with bad credit need to know about loan co-signing, so that you can have all the information you need to decide whether or not to use a co-signer.
Co-Signing A Loan Means Sharing Responsibility – And Debt
A co-signed loan is a completely shared responsibility. If the primary signator of the loan fails to make payments or defaults on his payments, the cosigner is completely responsible for the repayment of debt in full.
This is the primary reason that co-signed loans are attractive to lenders and borrowers. An individual with bad credit can get a great deal on a low-interest loan, and the lenders can mitigate the risk of the loan by requiring a cosigner who has good credit to be responsible in case of late payment or default.
If you fail to repay your loan, your cosigner will be on the hook for repayment. So ensure that your finances are in good order, and that you can handle repayment of your loan. If you can’t, you should not take out a co-signed loan – or it will lead to disaster.
There Is (Usually) No Way Out Of A Co-Signed Loan
Co-signing a loan is legally binding. For all intents and purposes, money has been lent to the co-signer, and they are responsible for paying it back if the primary signator defaults.
There is no way out of a co-signed loan. There is no way to “remove” the co-signer from the loan. If you decide to take out a co-signed loan, you’re in it for the long haul – until the debt is completely paid off.
A Co-Signed Loan Will Affect The Credit Scores Of Both Signers
This is one of the reasons that co-signed loans are popular among individuals with bad credit. They can safely secure a large credit line and pay it off in a reasonable manner, increasing their credit score.
However, it’s important to note that negative credit blemishes will register for both the borrower and the co-signer. If the borrower makes late payments – or defaults – this change will be noted in both credit reports.
While a smart, cosigned loan can help you build your credit, failing to make payments doesn’t just destroy your own credit – it harms that of your co-signer. Be certain that you’re ready to make the commitment to pay on time if you take out a co-signed loan.
Co-Signers Aren’t Always Notified Of Missed Payments
The primary borrower is usually the first person notified in case of a missed payment. Depending on the lender, the co-signer may not even be notified officially.
Despite this, co-signers are usually the first person who is turned to once a payment is missed – they have better credit, and are expected to be responsible for repaying the debt of the primary borrower, despite the fact that they did not receive any money.
If you do take out a co-signed loan, ensure that you communicate with your cosigner to let them know when you make payments – or when you may struggle to do so. Being open and honest is crucial to making a co-signed loan work.
Co-Signing Isn’t Always Necessary – Even With Bad Credit
Most banks require co-signing for individuals with bad credit, but if you take the time to explain your situation to a bank or a credit union, you may find that you qualify for some specialized loans for individuals with a poor credit history.
Take the time to explain your situation, the steps that you’ve taken towards rebuilding your credit score, and your current financial situation. If you do so, you may be able to secure a small loan even without a cosigner.
Your APR will likely be higher, but you won’t have to risk the credit rating or savings of a friend or loved one – making it well worth the price.
In Canada? Need To Get A Car Without A Cosigner? Come To Ride Time Today!
Co-signing a loan can be risky – but at some car dealerships, it’s the only way for folks with bad credit to get a reasonable rate on a vehicle.
This is not the case at Ride Time. Located in Winnipeg, we have a network of 15+ lenders who specialize in issuing fair auto loans to individual who have bad credit. If you can provide us with valid driver’s licence, proof of 3+ months of employment, and a pay stub indicating a total monthly income of $1500 before deductions, we can almost guarantee you a great deal on a used car. No credit check needed, no cosigner required.
Don’t put the credit of your friends, family, and loved ones at risk. If you’re in Canada and need to finance a used car with bad credit, browse Ride Time’s great selection of used cars, trucks, and SUVs. We offer nationwide delivery of our vehicles, and we will work with you tirelessly both to find the perfect car for your needs, and to secure you a reasonable rate on your auto loan. Guaranteed.