Whether for education, a wedding, or buying a house, a personal loan can be used for almost anything. Borrowers, however, must fulfill specific eligibility requirements to qualify for the loan or get their preferred personal loan interest rates. These include minimum credit ratings, loan repayment structures, and many others. People with low credit scores or self-employed with weak financials are often denied loans. In such cases, banks or financial institutions usually require a co-signer.
A co-signer is an individual with a good credit score who guarantees repayment of the loan if the original borrower defaults. The person taking on the accountability and debt guarantee should do so with comprehensive research and analysis. This article will examine a few questions a person should ask before committing to co-sign a personal loan.
Cosigning a personal loan: What questions to ask?
Cosigning a loan is a huge responsibility and should be undertaken with great caution. Before cosigning a personal loan, one must ask these questions:
Why does the borrower need a co-signor?
- The primary question a person would ask when someone asks them to be a co-signor is why do they require one in the first place. Even if the borrower is a close relative or friend, it may not be wise to guarantee their loan if they are denied the loan due to poor financing, repayment troubles, or low credit history. The individual, however, can help the borrower with the loan if he is a student who hasn’t been able to build up his credit score or hasn’t started earning income yet. The borrower, however, should be known to the borrower rather than a stranger.
How will your credit score be affected by this?
- By co-signing a loan, a person becomes part of the loan and is responsible for its repayment. In other words, they are taking on debt that will impact their credit rating. If the payment is made on time, it will reflect positively on both the consignor and borrower’s credit reports. However, if the borrower defaults on repayment, then it will negatively influence the consignor’s credit score for the future. Furthermore, if someone has offered to co-sign, the credit report shows it. If the person requires funds in the future, the lender will take this into account before granting the loan.
What is the strategy for repayment of loans?
- Before cosigning a personal loan, the co-signor must ask the borrower when and how he intends to repay it. A detailed plan on repayment schedule with information on any additional liabilities should be requested from the borrower. There should also be a plan in case of the borrower’s untimely death. If the borrower does not have a clear goal or answers vaguely, it may not be a good idea to cosign.
What is the purpose of taking the loan?
- The co-signors have a right to know what the borrower intends to do with the loan amount. Whether the funds will be used for legal purposes or for lavish purchases that are not necessary, knowing this information helps the co-signor make a more informed decision.
Can you release yourself from loan obligations in the future?
- Once committed, releasing yourself from the loan obligation is not easy. Co-signors should ask the borrower for an agreement that transfers the loan completely into their name and frees the co-signor from financial burdens. The borrower must be qualified to refinance the loan, which cannot be predicted in advance.
In addition to helping people achieve their goals, cosigning a personal loan can assist them in obtaining reasonable personal loan interest rates. The co-signors can also use the personal loan EMI calculator to determine how much monthly payment the borrower has to make and whether he can do so with his current income. For further assistance, co-signors can always consult a financial advisor as well.