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What To Know About Getting A Personal Loan With A Co-Signer

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On paper, getting a co-signer on a loan seems like a no-brainer: You may benefit from better rates, and both you and your co-signer could see a credit boost if you make on-time payments. However, there are downsides that you and your potential co-signer should understand before you sign on the dotted line.

What is a co-signer?

A co-signer is someone who applies for a loan with another person and legally agrees to pay off their debt if the primary borrower isn’t able to make the payments. A co-signer could be a friend, family member or anyone close to you who has a strong credit score and a consistent income.

Co-signers are common in cases when the borrower is struggling to get approved for a loan based on their credit score, income or existing debt. Lenders perceive applicants with poor financial history as high risk — there’s a chance they won’t be able to repay the loan, which means that the lending company will lose money. A co-signer with good credit improves the primary borrower’s overall creditworthiness, meaning lenders are more likely to approve the loan or offer better rates.

Get pre-qualified

Answer a few questions to see which personal loans you pre-qualify for. The process is quick and easy, and it will not impact your credit score.

How do you use a co-signer for a loan?

If you’re in a situation where you might need a co-signer, you’ll first want to find the right co-signer. In theory, anyone can be a co-signer for a loan. In practice, however, it’s likely going to be a family member or a close friend.

To use a co-signer, you’ll tell the lender that you plan on having someone else co-sign the loan. The lender will then ask for the co-signer’s financial information and details and adjust the terms of the loan accordingly. The co-signer will also have to be present at the closing of the loan in order to officially sign alongside the primary applicant.

When does co-signing make sense?

Co-signing a loan can be risky, but it can also be beneficial if done correctly. It’s particularly common for young adults to use co-signers, since they often have unpredictable income, a low credit score and little to no credit history. Because of this, it can be difficult or impossible for them to get a loan without a co-signer. As such, parents often co-sign their children’s student loans when they’re in college.

Co-signing also makes sense for someone trying to get back on their feet. Someone who previously lost their job but needs a car to travel to interviews might use a co-signer to take out a personal loan. Presumably, that person will eventually have a job that allows them to comfortably afford their monthly payments.

In any situation, co-signers are there in the event of an emergency. They’re not expected to pay a cent when they sign their name on the loan application, but they are willing and able to use their own money to pay down the loan if the debtor is unable to.

The risks of being a co-signer

If you’re thinking about co-signing a personal loan, there’s a lot on the line. “The reality is, if the lender felt the original debtor could pay back the loan on their own, they wouldn’t need a co-signer,” says Damon Duncan, a bankruptcy attorney in North Carolina. “Finance companies have decades of collective data and information that helps them determine the likelihood someone will pay back a loan on their own. If they aren’t willing to give the person a loan without a co-signer you probably shouldn’t be the one willing to co-sign.”

Here are six reasons why you should think twice before co-signing a loan.

1. You are liable for the full loan amount

Co-signing a loan makes you liable to pay for the entire balance should the guilty party fail to pay. And, unfortunately, most lenders are not interested in having you pay half of the loan. This means that you’ll have to work it out with the other party or get stuck paying off the entire balance.

“Think not only about the amount the loan is for but also the duration,” says Jared Weitz, CEO and founder of United Capital Source, a nationwide small-business lender. “Once you sign a loan, it’s not for a few months, it’s for the entire duration of the existence of the loan — sometimes this is years.”

2. Co-signing a loan comes with a high risk and a low reward

You might co-sign on a loan for a car you’re not driving or a mortgage for a house you don’t live in, but that doesn’t change your liability if the primary borrower fails to make payments. Your credit score benefits only slightly from the monthly payments. And since you qualified as a co-signer because of your good credit, you don’t necessarily need more credit lines.

3. You have to be organized enough to keep track of the payments

If you co-sign a loan, you’ll want to keep tabs on monthly payments, even if you trust the person you co-signed for. If you wait to get a call from a bill collector informing you of missed payments, your credit will already have been negatively impacted.

“Set up a calendar reminder or automatic update online to notify you of payment dates and the status of the loan,” says Weitz. “If needed, set up a monthly check-in with the borrower yourself to make sure there are no red flags approaching that may lead them to no longer be able to make payments.”

4. The lender will sue you first if payments are not made

If the primary applicant defaults on their personal loan, the lender will come after you first. After all, the primary applicant likely does not have stellar income or many assets. If they did, they wouldn’t have needed a co-signer in the first place.

In addition to the financial strain this places on you, this type of situation could also place a significant strain on your relationship with the person you have co-signed for. Constantly ensuring that the other party has made payments can take a toll on friendship, and, as the co-signer, your desire to not suffer any negative impacts could be construed as mistrust.

5. If the debt is settled, you could face tax consequences

If the lender doesn’t want to go through the trouble of suing you, it may agree to settle the balance owed. That will mean you could have tax liability for the difference. For example, if you owe $10,000 and settle for $4,000, you may have to report the other $6,000 as “debt forgiveness income” on your tax returns.

And settling on the account will leave a negative mark on your credit report. The account does not state “paid as agreed,” but rather “settled.” Your credit score suffers because of that new mark.

6. Co-signing could make approval of your own loan impossible

Before co-signing a loan, think ahead to future loans that you might need. Even though a loan you co-sign is not in your name, it shows up on your credit report, since it’s debt that you are legally obligated to pay. So when you go to apply for another loan in your own name, you might find yourself denied for an application because of how much credit you have in your name.

Alternatives to co-signing

If you’re unable to find a willing co-signer, or if you want to avoid the risks associated with co-signing, there are several alternatives that can help you get the money you need:

  • Build your credit: The main reason why applicants struggle to get approved for loans is because they have a poor credit score. Put your application on hold and work on getting your credit score to a place where lenders will be willing to give you a loan. You can build your credit by paying bills on time, paying your credit card balances in full or paying more than the minimum monthly payment.
  • Offer collateral: Some lenders will accept collateral in exchange for your loan. If you’re comfortable with the risk, think about putting down your home or vehicle as collateral. Remember that if you can’t pay off your loan, you will lose your collateral, which can put you in serious financial trouble.
  • Search for bad-credit lenders: Lenders that specialize in personal loans for bad credit may be the best place to turn if you’re having trouble qualifying elsewhere. You may encounter double-digit APRs, but these lenders are more trustworthy options than payday lenders.

Get pre-qualified

Answer a few questions to see which personal loans you pre-qualify for. The process is quick and easy, and it will not impact your credit score.

The bottom line

If you’re having trouble qualifying for a loan on your own, enlisting a co-signer could be a viable option. However, before accepting the loan offer, sit down with your co-signer to have an honest discussion about the loan amount, terms and repayment plan. If you have contingencies in place, it’s less likely that your relationship will be at risk down the line.

Featured image by Bruce Ayres of Getty Images.

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Evicted California renters at greater risk of getting COVID-19

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After 70 years in Monterey County, 87-year-old Mary Martinez moved in the middle of a pandemic, evicted from her modest one-bedroom, second-floor apartment at 1118 Parkside St. in north Salinas.

According to her former landlord, Martinez was evicted because she allowed a “violent man” to live with her, violating the conditions of her lease. Martinez said the man is her epileptic nephew.

Advocates say that while evictions like Martinez’s are rarer during the pandemic, landlords are feeling the financial squeeze. Some have sold rental properties to make up for lack of income. That can leave renters out in the cold when their new landlord raises the rent by hundreds of dollars or requires all renters move out before they take over the building.

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New program to help Black-owned online businesses | Technology

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ATLANTA _ Many Black entrepreneurs struggle to get bank loans and professional help to launch new businesses. A new program aims to remove those stumbling blocks.

An Atlanta nonprofit and another business have committed $150 million to the 1 Million Black Businesses effort, which will make loans and provide financial and business advice to Black-owned startups and established small businesses. Atlanta-based nonprofit Operation Hope, which helps consumers improve credit scores, is kicking in $20 million, and Shopify, the online e-commerce is adding another $130 million for the loans and website-hosting services.

Other services firms providing expertise or help include Aprio, an Atlanta-based accounting firm, and First Horizon Bank.

It’s a package of products that many Black entrepreneurs couldn’t get through a bank or credit union, said John Hope Bryant, CEO of Operation Hope.

“A bank won’t lend you money unless you can prove that you don’t need it,” Bryant said. “That’s especially true with minority-owned small businesses.”

Small businesses with Black owners were half as likely to obtain business loans as whites, according to a Federal Reserve survey published earlier this year.

The initiative is the latest effort to help Black consumers and businesses enter the financial mainstream. Earlier this month, a group that includes rapper Killer Mike opened a digital bank aimed at Black and Latino consumers.

Banks and credit unions have tried for years to help Black consumers open checking and savings accounts. The efforts helped, as the number of U.S. households without bank accounts fell to 5.4% in 2019 from 6.5% in 2017, the Federal Deposit Insurance Corp. said Monday.

Consumers who own checking and savings accounts typically have access loans with better rates and a wider variety of financial services.

The federal government’s $660 billion loan initiative for businesses hit by COVID-19, the Paycheck Protection Program, also helped few Black-owned businesses, Bryant said. PPP loans were based on a company’s number of employees and its rent obligations. many Black-owned small businesses typically didn’t have enough workers to qualify and are based out of the owner’s residence.

Bryant said a bad credit history may not prevent applicants from receiving a loan.

He hopes more companies will contribute services such as insurance advice or software typically available only to well-established businesses.

Bryant noted that 1MBB is not a charitable organization, as participating companies like Shopify will likely get a pipeline of new business customers through the program.

“This is not pure philanthropy,” he said. “Shopify believes that Black-owned businesses are good businesses if they’re properly supported.”

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This Week’s Top Car Deals & Analysis – October 30, 2020

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The final days of October offer a chance to take advantage of outstanding model year-end deals. Most offers end November 2, which means there isn’t much time left to enjoy this month’s best lease deals and deepest new car discounts. We even found incentives that can help those with bad credit buy a new or used car.

2021 car deals. Interestingly, 2021 new car incentives are showing some surprises. For example, Audi is already offering up to $12,000 in savings when leasing the 2021 e-tron all-electric crossover. We even learned that the new Genesis GV80 SUV will debut with a $589/month lease deal plus special financing rates.

Believe it or not, the 2021 Hyundai Veloster N could prove to be a great value despite a nearly $4,700 price increase compared to the previous year. That’s because our analysis finds that better incentives can make it just $10/month more expensive to lease than the 2020 model. Talk about getting more for your money.

Why are small cars bad to lease? Even though smaller cars typically come with lower price tags, that isn’t always the case when leasing. A mix of lower discounts, worse residual values, and smaller discounts can actually make a Nissan Altima cheaper than a Versa despite having an almost $10,000 difference in MSRP.

Shorter-mileage leases. More brands are offering shorter mileage allowances on car leases. Although this is typically used to offer consumers more flexibility, we’ve found cases in which you can end up getting less for your money. If you don’t read all the fine print, this could make comparison-shopping difficult.

Bad credit car deals. If you have subprime credit, you may find it harder to get financed. However, some manufacturers are offering special incentives to help make cars & trucks more affordable. For example, Chevy is offering $2,000 in down payment assistance plus 9.9% APR for 72 months on the 2020 Trax.

$0 down leases. If you’re adamant about now putting down any money on a lease, you’ll love Sign & Drive leases. In addition to requiring no money down, $0 down lease deals can cover your first month’s payment. Even hot sellers like the Honda CR-V Hybrid offer $0 down and as little as $330/month on a lease.

The high cost of safety? Even though most major automakers are offering more safety features than ever before, our analysis finds that the highest IIHS safety ratings still require costly options in 2020. That’s starting to change, but the cost of buying a car with the most bragging rights is still very high.

Disaster relief. Those affected by some of this year’s natural disasters should be aware that automakers are offering assistance. California wildfire assistance programs like Ford Employee Pricing can save thousands when replacing a car. Similarly, a 2020 hurricane relief program from GM offers $1,000 in savings.

Spooky loan situations. There are some scary scenarios you can avoid when getting a car loan. However, boosting your credit score is possible with some determination because negative items on your credit report fall off after 7 years. Our network of dealers is specially equipped to help those with bad credit.

Upcoming vehicles. Genesis finally revealed the new GV70, a small luxury crossover based on the highly-rated G70 sedan. Whether it’s a redesigned car, truck, or SUV, odds are you’ll find it on our Previews page. That said, as we reported last week, discounts ahead of a redesign can result in substantial savings.

This Month’s Cheapest Lease Deals »



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