Taking out a loan for whatever reason can be a stressful venture. Sometimes, one may be in dire need of funds to take care of an emergency but does not meet the eligibility criteria for any form of loan. This can be a frustrating situation but what can such a person do?
There are several ways of going around some eligibility issues and one of them is applying with a co-signer. This concept is one that has been in existence even before banks institutionalized it. In ancient Rome, the person that guarantees a loan is known as the sponsio while in medieval Europe they are known as joint-debtor.
This person is usually one with a solid reputation in society who can vouch for a prospective borrower. The lender approves the loan on the merit of the creditworthiness of the guarantor knowing that the loan can be repaid by him if the borrower defaults. Sometimes the surety even puts down a pledge on behalf of the borrower.
In this article, we will discuss this concept in modern-day banking. Meanwhile, you can read this paper to learn more about traditional sureties or guarantors and credit systems in medieval times.
The Benefits of Applying for a Loan with a Co-Signer
From the brief introduction above, one clear benefit of having a co-signer is that people who do not have any asset of value to pledge for a substantial loan stand a chance to qualify. Let us go on to elaborate on this and other benefits: –
Enhanced Chance of Getting Approved for Loans
One of the factors that stop many people from getting approved for substantial sums of money is bad credit scores and history. Sometimes too, prospective borrowers do not have the requisite collaterals to present. In both scenarios, a co-signer can help the person’s case.
If it is a case of poor credit score, the co-applicant’s score can shore up the cumulative score of the applicants. This in turn enhances the chance of approval of the application.
Access to Loans with Better Terms and Conditions
Applying with a co-signer can help you qualify for loans with better terms. These terms can include longer repayment terms, lower interest rates, and higher loan sums. The high credit score and good financial history of a co-applicant will go a long way to shore up the chances of the one with the poor credit /history.
Improved Credit History
You can enhance your credit history by being a co-signer to a loan. With a co-applicant, you get a loan, and then you begin to service it and do so regularly and on time. This will help build your score and positively impact your financial history.
This positive impact on your financial history will in the future enhance your chance of getting approved for loans with favorable terms and conditions and even other financial opportunities.
Increased Borrowing Capacity
People who apply jointly for a loan can access higher sums of loans. This increased borrowing capacity comes about as a result of consideration of the combined income of both applicants. So,let us say you need money to buy a house or a caror sponsor a ward’s education, a joint application will guarantee a larger amount than a solo application.
Understanding the Responsibilities and Risks of a Co-Signer
Before you undertake the role of a co-applicant, you need to understand all that it entails so that you will not be blindsided at the end of the day. So, we will share some of the responsibilities and risks: –
Primary Borrower’s Default and the Co-signer’s Obligation
This refers to the obligation that the co-signer (kausjonist) has in the event that the primary borrower defaults. The co-applicant is obligated by law to pay back the loan if the primary borrower fails to pay. Bear in mind that the lender can apply any measure as agreed upon to recover their money from you as the co-signer.
So, if you are not prepared to pick up the slack if the person you applied with defaults, do not co-sign any loan application.
Negative Impact on the Credit Score of the Co-signer
If a primary borrower misses a payment or is late, it can negatively impact the credit score of the co-applicant. Any issues with the loan such as delinquencies or defaults will be shown on the credit report of both applicants (primary and co-applicant). Hence, to avoid any negativity on your record, both of you have to monitor the progress of the loan. You as the co-signer have to also ensure that payment is made as at when due to protect your creditworthiness.
Financial Liability and Legal Implications
Once you co-sign a loan, bear in mind that you have created a legal relationship between both of you. In the event that the primary borrower defaults, legal action can be taken by the lender against you to recover their money. You as a co-signer may have to face the legal consequences which may include the seizure of assets or wage garnishment.
It is crucial that you understand that you are bound by all the legal implications of the loan agreement. This in itself carries potential financial risks because you can be roped into a financial mess if the credit facility is not effectively managed.
Trust and Communication between the Applicants
There must be trust and transparent communication between both applicants. This will ensure that the joint application venture is successful. You both need to have clear expectations that are communicated without ambiguity. It also means that financial matters have to be discussed openly.
Both parties involved in the arrangement must keep each other abreast of the status of the credit and payment reminders. In the event that there is any difficulty in meeting a payment deadline, both parties should be aware of it and think of what to do to avoid negative consequences. Just as with any type of relationship, trust, openness, and reliability are especially important in ensuring a healthy financial partnership.
Finally, it is advised that the terms and conditions of this relationship be well spelled out. Both parties need to clearly outline the expectations, rights, and responsibilities expected of each other.
Factors to Consider Before Becoming a Co-Signer
Based on the foregoing segment where we highlighted the responsibilities and risks of being a co-signer, you can see that you need to consider some factors before venturing into it. Below are some of the factors to consider: –
The Primary Borrower’s Financial History and Creditworthiness
You must assess the financial history and creditworthiness of whoever you are co-signing for a loan. You do not want to be joined in a legal relationship with someone who does not have a solid financial track record or who is not creditworthy.
The Purpose and Terms of the Loan
Ensure that you know and approve of the purpose of the credit facility. Consider all the terms and conditions of the loan agreement before you append your signature to any legal document. Check out this site for more info:https://fastercapital.com/.
Evaluate the Character of the Primary Borrower
Since you will have to pay up the debt if the primary borrower defaults, it only makes sense for you to be sure of the character of the person. Are you sure that they have the financial stability to meet their obligations? Do they have the strength of character to keep to their word or would they shirk their responsibility? Ensure that your answers are in the affirmative before proceeding.
Many people have gotten into a financial mess because they co-signed a loan with someone who defaulted and left them holding the bag. That is why we have taken the time to discuss the risks and responsibilities involved in co-signing a credit. Bear these points in mind so that you can avoid getting into financial trouble.