Bad credit is one of the biggest obstacles to reaching major financial goals like buying a new car or a home. Lenders are wary of borrowers with short credit histories or blemishes like missed or late payments on their credit records. A co-signer is a third party, such as a parent or trusted friend, who agrees to pay off your loan in the event that you can’t pay. Using a co-signer can help you secure financing even with poor credit, but it is not without its disadvantages.
Overcoming Poor Credit
The primary benefit of getting a co-signer is that it can give you access to financing opportunities that you wouldn't be able to get on your own. When you get a co-signer, the co-signer's credit score essentially stands in for your poor credit score. The lender might not trust you to pay back a debt, but if you have a friend with excellent credit who co-signs your debt, the lender has greater assurance that the loan will be paid.
Another potential advantage of getting a co-signer is that it can allow you to build up your credit score, too. For example, young professionals often have short credit histories, which can result in below-average scores, but securing a loan with a co-signer and making faithful payments for a few years establishes a positive track record that can help build a good credit score. On the other hand, if co-signing gets you access to a loan that you can't handle, it could damage your credit score if you fail to make timely payments.
Risks for Co-signers
The risks of co-signing mainly fall upon the co-signer rather than the primary borrower. The co-signer gets no benefit from co-signing other than being helpful to a family member of friend. On the other hand, co-signing is very risky because the lender can collect payment from the co-signer in the event that the primary borrower doesn’t pay a debt. In essence, co-signers take on risk that lender aren't willing to accept and can end up paying for it out of their own pockets.
The main disadvantage of co-signing for the primary borrower is that finances can damage personal relationships. For instance, if you get a close friend to co-sign a loan, but you lose your job and can't pay it, your friend might be angry with you if he is forced to pay the debt on your behalf. Co-signing introduces a layer of financial tension into personal relationships.
- What Is a Prime Credit Score?
- Can Buying a New Vehicle Drop Your Credit Score?
- Does Paying During a Grace Period Affect the Credit Score?
- How Can Disputed Accounts Affect Your Credit Score?
- Does Cancelling a Cell Phone Plan Hurt Your Credit Score
- Can My Spouse's Credit Affect My Score?
- The Most Effective Ways of Having Excellent Credit
- How Does Guaranteeing a Loan Affect Your Credit Score?
- Do Credit Scores Get Combined for Married Couples When Buying a Home?
- What Affects Your Credit Score Negatively?