Loans & Co-signers

Loans & Co-signers

by | Oct 6, 2022 | Financial Institution

Loans can be difficult and complicated if you don’t do your own research, learning and comprehension prior to inquiring for one. It’s important to know all the ins and outs of a loan and all the policies and rules attached to it. So, what happens if you can’t get a loan on your own? You may consider a co-signer as an option.

What is a Co-signer?

A co-signer is someone who signs for a loan when the primary borrower on the loan cannot get one themselves. Some reasons for this might be poor credit or no credit history, insufficient income and poor reliability (for example, if someone has taken a loan out before but had multiple payment deferrals). Co-signers step in and help the primary acquire the loan. Co-signers usually must have good credit and steady income to back up the person who was not able to take out the loan on their own. The reason for this? Let’s find out.

The Responsibility of a Co-signer

A co-signer has a lot of responsibility in the loan, more than some might think. When a co-signer signs for a loan they are signing as a reliable party in the event the primary borrower cannot make their payments. In fact, the loan will report on the co-signers credit report as if it was their own loan. If the primary borrower defaults on a payment or stops making them then the co-signer would be in charge of making the payments for them instead.

Since the loan shows up on a co-signers credit report just like it was their own loan, this also means that any missed or late payments will show up on their credit report as well. This could have an impact on the primary borrower’s credit score as well as the co-signers credit score. If the primary borrower stops making loan payments altogether then the co-signer would have to take over the loan. A co-signer may also have to hold off on getting a loan of their own because it is harder to acquire a loan with another one still outstanding. This is why it’s important as either a primary borrower or a co-signer to make this decision carefully. Find out the terms of the loan, the responsibility both parties will have and read all the fine print of a loan agreement.

What happens when the Primary Borrower declares Insolvency or enters a Official Proposal?

This might be the biggest area where people get confused as to just how much a co-signer is responsible for a loan. When the primary borrower files for bankruptcy, then the co-signer is now 100% responsible for the loan and its repayment. When the primary borrower files for a consumer proposal, some of the loan will be forgiven, but the amount that the co-signer is responsible for will still be up to them to pay off. Therefore, it is important to figure out exactly what the co-signer is responsible for when co-signing on a loan.

There are a lot of risks to co-signing a loan, whether it is for someone you absolutely trust, or not. It could have a strain on the relationship if anything were to happen during the loan term, whether it be defaulting on payments or a personal matter. Make sure that you are co-signing for the right reasons and are ready to take on the responsibility of co-signing a loan.
There are some positive outcomes for co-signing a loan. If loan payments are paid in-full and on time, it could help to raise both the primary borrower’s credit score as well as the co-signers. Another scenario where a co-signer could be helpful is if someone has a child or dependent who is not old enough yet to have built enough credit to acquire a loan, this would help build that credit.

If you are ever in need of debt-relief and are wondering which options you could pursue with a co-signer, give us a call at 800-335-8176 and we can go through all the options and procedures with you!

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