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How to get someone to co-sign a loan

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Maybe your car broke down for the last time and you need a new one. Or maybe you have home repairs that can no longer be postponed. Whatever your specific situation, you need a loan, but you cannot qualify on your own. And that’s where the idea of ​​asking a friend or family member to co-sign a loan comes in. Before asking someone to co-sign a loan, however, consider the ramifications. If you decide to continue, you will need a plan.

Why you might need a co-signer

There are many reasons why you might need a co-signer to get a loan. Here are several:

  • Insufficient Credit History: Building credit can be tricky if you’re new to the country, are a recent graduate, or have lived off the credit grid for a while. You might need a co-signer if you don’t have enough credit history to qualify for a loan on your own.
  • Irregular Income: Let’s say you own a business and some months you earn a lot of money while other months are slow. You know you can afford the monthly payments, but it’s hard to prove it to a lender without a regular monthly income.
  • Bad Credit History: You’ve had credit in the past, but struggled to pay it off as promised. As a result, your credit rating is too low to qualify for a loan without a co-signer.

Understand the risks

There is no doubt that asking someone to co-sign a loan is a huge demand. Even if their credit is near perfect, co-signing a loan for you takes the power away from them. If you fail to make a payment, their credit will suffer just like yours.

Whether you make the payments or not, the amount you borrowed shows up on the co-signer’s credit report as their debt. This increases their debt to income ratio (the amount of a person’s debt relative to their income). And it might be more difficult for them to get approved for a loan if they need it before your loan is fully paid off. If you die or stop paying, they are legally obligated to repay the loan.

In other words, asking someone to co-sign a loan shouldn’t be taken lightly because once they sign on the dotted line, their credit is tied to yours.

How to ask

If you understand the potential risks to someone else’s credit but still want to ask them to co-sign, here’s how to do it right.

Be clear and detailed on why you need a loan

If you’re asking someone to take the risk of co-signing a loan for you, respect them enough to explain why you need a co-signer. If this is due to poor credit, be honest about what is causing your credit rating to drop. If your score is due to mistakes you made, be open about it.

You have the legal right to obtain a free copy of your credit reports from the three credit bureaus once a year. Download these copies and give them to your potential co-signer. It can be a tough conversation to have, but if they get married in your honor, they’ll likely want to know what they’re getting into, including the type of credit and spending habits you’ve had in the past.

Give the person the option to be the primary account holder

If your co-signer agrees to become the primary account holder, that means you pay them monthly and they make the payment on the due date. As long as they are in control of when the payment is made, they don’t have to worry about whether or not you make it. In addition, all correspondence and invoices will be sent to the co-signer, so that they always know what is happening with the loan.

Offer guarantees

If you are asking someone to co-sign a loan of any kind (including a credit card), offer collateral of enough value for the co-signer to sell if you miss payments. This may be the only way they can afford to pay off your debt without ruining their credit. For example, if you need a loan of $ 5,000, the collateral should be worth at least that much.

Buy a life insurance policy

While it sounds morbid, the co-signer is still held responsible if you die before your debt is paid. Let’s say you borrow $ 15,000 to buy a used car. Before the co-signer adds their name to the loan agreement, buy a small life insurance policy which is payable to them in the event of death. Depending on your age and health, a short-term life insurance policy can be relatively inexpensive.

Suggest a release date

Usually, you need time to build your own credit. As you discuss the situation with a potential co-signer, decide when you plan to refinance the debt on your own behalf. For example, if you take out a Personal loan to do a home repair, promise to refinance, or have the co-signer name removed in 12 to 24 months (depending on your credit status).

Put everything in writing

If someone agrees to co-sign a debt for you, every detail should be written down so that it is clear to both of you. Include the following:

  • What is the loan for
  • How long will the loan last
  • Which of you will be the primary account holder
  • When payment is due each month and how you are going to pay (e.g. directly to the co-signer bank account)
  • What you offer as a guarantee
  • How many payments you can miss before the co-signer can take possession of the collateral
  • Whether you purchase life insurance with the co-signer as beneficiary
  • When will you provide the co-signer with a copy of the life insurance policy (they should not sign the loan documents until you do)
  • When considering refinancing the loan in your name or having the co-signer name removed
  • How will you provide proof that the co-signer is no longer responsible for the loan

Once you have a written agreement that you are both comfortable with, sign it in front of a notary and have the document legalized. Make sure you both have a copy for your records.

Finally, don’t be angry (or surprised) if someone walks by when you ask them to co-sign. It is a huge responsibility that does not offer them any benefit. If you can find someone willing to take the risk, reward them by sticking to your end of the bargain.

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