My relative has bad credit – Should I cosign?
Should I cosign?
Before you cosign on a loan let’s be clear what it is. What is cosigning? It is the act of signing on another person’s debt with them, (a car, house, any type of loan) guaranteeing that the cosigner will make the payment in case the buyer cannot. In this article, you will learn the pros and cons of cosigning, what a cosigner does, and why someone needs a cosigner.
Back in the day, a man was as good as his word. Some people would shake hands when they made a deal. Today, a credit score tells how responsible you are at paying your bills.
Credit is when a bank or company loans money to buy something now and is paid back in monthly payments, plus interest (money paid regularly at a particular rate for the use of money lent, or for delaying the repayment of a debt), until the money is paid back in full. The higher that your credit score is, the more the company will trust that you will pay the loan back on time.
Someone should start building their credit at least by 18 years old. Even if it is a part-time job during school, you can apply for a secured credit card. This is not a regular credit card, you make a deposit into an account and that is what your credit limit is for the card. There are several ways to build your credit:
- Have someone make you an authorized user on their credit card account, even if they don’t give you a card
- Get the secured credit card, but only charge what you can pay in full each month
- Get a small loan with a finance company for just a couple hundred dollars even if you have to use a cosigner.
Once you have these accounts going good for about six months, you will want to check your credit score. there are three credit bureaus: Transunion, Equifax, and Experian. Everything is not reported to all three bureaus, so each score and report will be different. The report tells: the company that you borrowed from, the date you got the loan, how many months the loan is for, the balance owed, and how good you’ve been making your payments. They credit score is your report card for credit:
- Excellent 760+
- Good 700-759
- Fair 621-699
- Poor 620 and below
- No Score means not enough credit established
They better your score is, the easier it is to be approved for a loan and the interest-rate will be lower. However, interest-rates are higher for people with no credit or bad credit. The company doesn’t know how that person will pay their bills whether on time or not at all. If you don’t have a score, the company might suggest that you get a cosigner.
Fill out a credit application and turn it in. Your credit will be reviewed and your income will be verified. then, they decision will be made based on a few things:
- Credit score
- Amount of monthly income
- How much credit is already being used
- Types of credit being used (car loan, mortgage, credit cards, school loans, or personal loans)
- How many other companies have you applied credit with recently
- Type of collateral (something you are willing to lose if you don’t pay the loan back, the company or bank will hold the title until it is paid in full)
The creditor takes the income and subtracts what you go from it. Example: if you get $1000 per month, your bills are $300 per month, then you will have $700 left per month. This means that your debt to income ratio is 30%. Generally, a 40% debt to income ratio is the highest a company will loan. The debt to income ratio is based on your gross income (before taxes).
If the loan is approved, be sure to look at the payment and make sure you can afford it. Check your interest rate to make sure it is not high. Check the spelling of your personal information. Make sure everything is correct and you are satisfied before signing the loan documents.
Just like with everything else in life, there are pros and cons to getting or being an cosigner.
- Better chance of approval
- Lower interest rate
- Can help build the borrower’s credit or improve any bad credit
- If the buyer can’t pay, the cosigner is responsible for paying the payments
- Possibly losing a friend or family member by messing up their credit (there is an old saying: “Do not lend money that you can’t afford to get back”)
- Cosigner pays the payment
There are advantages of using a cosigner:
- Build your credit or improve bad credit
- Better chance of getting the loan
- Better interest rate = lower payments
To cosign on a loan you could be taking on a big risk. If the person who want you to cosign has bad credit, there is a reason. Remember, if they make late payments, your credit is affected. Stop and look at the payments, if the borrower can’t make the payments, can you? Ask the lender to notify you if any payment is late. Make sure you fully trust the borrower and stop to consider all possibilities, even unforeseen emergencies. Inquire about refinancing the loan after a certain amount of time has passed with perfect payment history, then you will be released from responsibility.
If you get sick, lose your job, or an emergency comes up and you just cannot make a payment, contact the company. Most of the time, the company will be happy to work with you, whether it is skipping this month and paying two payments next month or possibly adding the payment to the end of the loan.
Once you get a good credit history built, do your best to keep it that way. Always watch high interest rates. Safeguard your credit the best that you can. The FCC offers free credit reports yearly from all three credit bureaus, make sure everything is correct on your reports. Be extremely careful when sharing your credit with others, nobody cares about your credit like you do.
Even if you think you will never want or need credit, it is guaranteed in this life, you will use it eventually.