WATER: I am planning a permanent guarantee for a loan. What are the risks?
Dubai: There is more to a permanent guarantee or co-signing of a loan than just lending your signature. Before helping a family member or loved one, make sure you understand the impact that co-signing a loan can have on your finances and credit score.
When you are a guarantor or co-sign a loan or credit card application, you formally assume legal responsibility for the account, which means all debt and payments will show up on your credit report. But let’s briefly go over what exactly co-signing involves.
When you co-sign a loan, you agree to pay off someone else’s debt if the borrower stops making payments for any reason. The most important reason a co-signer is involved when taking out a loan is that a co-signer helps a borrower get approved by adding their name to the application.
In addition to being responsible for repaying the loan, if the borrower cannot or does not repay, a co-signer may also have to repay accrued interest, late fees that may have accrued, or costs incurred by any collection. debt. agency – if they have been responsible for collecting contributions.
How is being a co-signer different from being a co-applicant?
Being a co-signer is different from being a co-signer because the co-signer is not asking to use the loan money. Instead, the co-signer promises that they will repay the loan if the borrower stops making payments or defaults altogether.
Types of co-signed loans
There are a few important differences in the types of loans that can be co-signed, including mortgages, student loans, auto loans, and personal loans.
If you co-sign an auto loan, it doesn’t give you any rights to the car. But you are responsible for the loan if the borrower fails to make his payments.
Likewise, co-signing a mortgage does not give you the rights to the house as an occupant, and co-signing a personal loan does not allow the money to be returned to you, but you will be responsible for repayment. of the loan. in both cases.
Main advantages and risks associated with the participation of a co-signer in a loan
Co-signers are needed when the borrower is unable to qualify for a loan on his own. This can happen for a variety of reasons, such as insufficient income to cover loan repayments, insufficient credit, a history of bankruptcy, or no history of borrowing money.
Co-signers usually have sufficient income and sufficient credit scores to bolster the loan application. With the co-signer involved, lenders can decide whether to approve an application.
While these are the main benefits of being a co-signer, what are the risks?
Co-signing a loan requires you to pay the entire balance if the primary borrower does not pay. Keep in mind that most lenders are also not interested in charging you half of the loan. This means that you will have to settle the problem with the primary borrower or possibly pay off the entire balance.
You can co-sign a loan for a car you don’t drive or a mortgage for a house you don’t live in, but it doesn’t change your liability if the primary borrower doesn’t make payments. Your credit score benefits only slightly from the monthly payments.
If you are co-signing a loan, you will want to keep an eye on the monthly payments, even if you trust the person you co-signed for. If you wait to receive a call from a debt collector informing you of missed payments, your credit will have already been adversely affected.
Even if a loan that you co-sign is not in your name, it shows up on your credit report because it is debt that you are legally obligated to pay. So when you apply for another loan in your own name, you might be denied an application because of the credit you have in your name.
What are the rights and responsibilities of a co-signer or permanent guarantee?
Being a co-signer does not give you any rights to the property, car, or any other collateral the loan pays. You are simply a financial guarantor, and if the principal signer fails to repay the debt, you are next to make it happen.
Credit history, credit score, income, debts, employment, and other financial details are all likely to be considered part of the loan application when you agree to become a co-signer for someone. .
Bank analysts believe that a lender will look for a co-signer to bolster the credit profile of an application, usually because the borrower does not qualify alone. For this reason, you will likely need to pass a rigorous credit check when the primary borrower submits their application.
It’s important to understand that being a co-signer can ultimately hurt your own credit score if the borrower makes late payments, as any action on the loan is tied to both the primary borrower. and your credit reports.
On the other hand, being a co-signer can also help improve your credit score if the borrower is someone who is responsible for always making payments on time.
Additionally, if the primary loan signatory stops making payments or becomes late, you can request a “co-signer release”. This is a form that the primary borrower will need to sign to release you from the loan obligations.
In addition, the lender must also approve the removal of the co-signer (which they will only do if the primary borrower can demonstrate that they have the credit and history to handle the payments).
If I plan to co-sign, what should I consider?
If you’ve been asked to co-sign someone’s loan, while your good credit may help a friend or loved one reach their financial goals, you must ask yourself if it’s financially good for you. Here are some things to consider before signing:
Type of loan you are co-signing for: Secured loans are riskier for borrowers because there are collateral involved – a house, car, or other asset. Any additional risk for the primary borrower is also a risk for the co-signer.
Risk in relation to your high credit status: Lenders may want to see co-signers with high credit scores, a long history of consistent and on-time payments; stable employment and verifiable income. But if this applies to your finances, the question is whether you are willing to risk your high credit status to co-sign the loan.
Long-term rewards of being a co-signer: If you co-sign a loan to help your child go to college or build credit early, the risk may be worth it in the long run.
Financial planners believe that if you’re just helping a friend pay off their credit card debt or buy a car that’s out of their price range, it’s probably not the best solution – for you or for them.
Is the co-signing different depending on the type of loan?
The co-signing process may seem different from one lender to another, but the responsibility of a co-signer, regardless of the type of loan, will generally remain the same: making payments if the primary borrower does not.
The release of the co-signer, on the other hand, may be slightly different depending on the type of loan.
For example, some mortgages require the primary borrower to refinance in order to release a co-signer from the loan, while others, like education loans, have rules about when the primary borrower can assume. full responsibility for the loan.
How to protect yourself when co-signing a loan?
The first way to protect yourself as a co-signer is to be aware of what you are signing up for. Talk to the primary borrower and ask them what their income is and how they plan to make monthly payments.
It also involves a thorough review of the loan and its terms so that you know exactly what you are responsible for if the primary borrower is unable to make the payments on time. The best way, experts say, to protect yourself initially is to be as informed as possible.
Once you know the terms of the loan, make a plan with the primary borrower that involves monthly recording when payments are due. This will not only create a level of liability, but also keep you up to date with what you might be responsible for paying.
Finally, before signing, set a schedule that will allow the borrower to increase their credit rating or build up a financial history without leaving you potentially responsible for payments for an extended period.
If I decide not to co-sign a personal loan, what are the alternatives?
Before a borrower asks someone to co-sign a loan, here are some ways to determine if that’s the only way to get financial help:
First of all, what you need to do in case you don’t want to co-sign a personal loan for a friend or family member is to look for another type of loan. The borrower could choose a cheaper option.
For example, where possible, buy a cheaper car instead of a car that requires a large loan, or, if the borrower needs money for education-related expenses, he or she can contract a student loan that will not require co-signing.
Sometimes a gift or loan from a friend or family member is an easier – and less stressful – way to get or avoid a loan. For example, a larger down payment on the purchase of a house or a car could help a person get approved for a loan on their own.
Some lenders will accept collateral in exchange for your loan. If you are comfortable with the risk, consider putting your home or vehicle as collateral. Remember, if you can’t repay your loan, you will lose your collateral, which can put you in financial difficulty.
To note: Even though borrowers really want a loan, they need to make sure that they absolutely need it. The risks that a co-signer must take are considerable. Borrowers might not need help getting a loan if they wait another year or two and build up their credit report.