Several banks and creditors permit cosigners on application, and it's common for parents to cosign loans and credit cards for their children, and vice versa. Cosigning greatly benefits the person who needs financing; still, it's important for the person cosigning the loan to understand how the process works.
What is Cosigning?
Fully comprehending how cosigning works is imperative before signing your name to anyone's loan application, including a parent. Banks and credit cards hold cosigners liable for the unpaid balance if the primary borrower defaults or encounters hardship that prevents repayment of funds. If a bank can't get a payment from the primary borrower, the bank will begin contacting cosigners for payment. Signing your name to the agreement indicates your willingness to make loan payments in the event of default.
Help Applicant Acquire Credit
The key benefit to using a cosigner is the ability to acquire financing with credit issues. This can include no prior credit history or a low credit score. Various lenders -- such as credit cards, auto lenders and mortgage companies -- generally require a credit history before extending a loan or line of credit, and those who don't require it usually charge higher interest rates to compensate. Before approving a loan, lenders and creditors check the credit status of cosigners, and only approve applications if the cosigner meets the criteria.
Better Credit
Once a person acquires the credit needed with the help of a cosigner, he can begin building a better credit score, and possibly qualify for future loans on his own. Getting new credit helps rebuild credit scores after major issues such as a bankruptcy discharge, foreclosure or repossession. Improving credit involves wiser credit choices such as paying bills on time and limiting the amount of consumer debt.
Considerations
Buying a car or house with a loan generally requires a certain amount of income. Lenders review present debts and then verify present income -- such as by contacting employers or requesting W-2s. Borrowers with a lot of consumer debt may have difficulty qualifying for a loan, and will require the help of someone, such as a child. Children who cosign loans with their parents must provide a copy of their W-2, tax return or most recent paycheck stubs. Lenders then base approval on the combined income.
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