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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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Bad Credit

Will Missing One Car Payment Hurt My Credit Score?

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The short answer is yes: skipping one car payment can hurt your credit score, but not until it hits a certain mark. One missed payment doesn’t destroy your credit score forever, but it can stay on your credit reports for years.

Missed Payments and Your Credit Score

One or two missed payments may not be enough to completely ruin a good credit score, but they can lower your credit score quite a bit. How much your credit score can drop depends on many things, including how much credit history you have and how much time has passed since your missed payment.

How much a missed payment can impact your credit score is heavily influenced by how many missed payments you currently have reported, your current credit score, your credit utilization, how many accounts you have, and more. In other words: your drop in credit score due to one missed car payment is likely to be unique to you. The drop in points could be anywhere from 10 to 100 points, or more.

Will Skipping One Car Payment Hurt My Credit Score?If you have a thin credit file or little to no credit history, one missed car payment can be devastating to your credit score. And, in some cases, having a good credit score and then a reported 30-day missed payment could hurt your credit score more because you have more to lose.

The severity of the missed payment matters too. If you’re 30 days on the payment, it’s not as bad as being 90 days late. Most creditors report missed payments in these timeframes: 30 days; 60 days; 90 days; 120 days; 150 days; and then delinquent/charge-offs after that. The longer you let that missed payment go on being missed, the worse it is for your credit score.

To bounce back from a missed auto loan payment, be sure to make that payment as quickly as you can. The sooner you make up that payment, the better off you are.

How Long Are Missed Car Payments Reported?

Missed and late car payments can remain on your credit reports for up to seven years. How much they damage your credit score lessens each year, but it can still impact your overall credit score years afterward.

Your payment history is the most influential part of your credit score: a whopping 35%. In terms of credit repair, this means making all of your bill payments on time is important. If you have an auto loan that isn’t currently being reported – meaning your loan and on-time payments don’t show up on your credit report – the missed and late payments are likely to be reported anyway. Even auto lenders that don’t generally report their loans to the credit bureaus typically report missed/late payments.

If you think you’re about to miss a payment and you want to avoid hurting your credit, you have some options to explore.

Ask Your Lender for a Deferment

Lending institutions understand that times can get tough. If you think you’re about to miss a payment, contact your lender right away and ask what options are available to you. Keep your lender in the loop if you’re going through rough times – the sooner you get ahold of them the better.

This is especially true right now, given the current pandemic. Many borrowers left without work have been forced to find alternatives to making payments and needed assistance with their car loans and mortgages. There is a process that allows borrowers to take a breather and gather themselves, and it’s called a deferment.

A deferment, in a nutshell, pushes the pause button on your auto loan. Most times, lenders pause the car payments for up to three months and add those payments to the back of the loan term. If you qualify, you may be able to recenter yourself and get back on track. After the deferment is up, the car payments resume and you continue paying as normal.

The only downsides to this option are that your interest charges continue to accrue, and your loan term is extended. However, in the grand scheme of things, a few more months of a car payment and interest charges is better than default or multiple missed payments!

There is a common stumbling block to deferments though: most lenders don’t approve these plans unless your current on the loan. If you’ve already missed one payment or more, then the lender isn’t likely to approve it.

Is Refinancing Your Auto Loan an Option?

If you’re struggling to keep up with your current car loan, refinancing for a lower monthly payment could be the answer.

Refinancing involves replacing your current loan with another one, typically with a different lender. Most borrowers refinance to lower their monthly payments by either lowering their interest rate or extending their loan term (sometimes both).

To refinance, you also need to be current on your auto loan. Most lenders that offer refinancing don’t consider borrowers with multiple missed/late payments on their car loan. Additionally, you generally need to meet these requirements for refinancing:

  • Must have equity in the car or the loan balance must be equal to the vehicle’s value
  • The car is under 10 years old with fewer than 100,000 miles
  • Your credit score has improved since the start of the loan

You may need to meet other requirements, depending on the lender you choose. Refinancing doesn’t typically require a “perfect” credit score, but you may need a good one to qualify.

Ready to Get a More Affordable Car?

If you’re struggling to make ends meet and worried about skipping payments, then it may be time to sell your car and get something more affordable. If you’re concerned that a poor credit score could get in the way of your next auto loan, then consider a subprime lender through a special finance dealership.

Subprime lenders are indirect lenders that are signed up with certain dealers. They assist borrowers in all sorts of unique credit circumstances, and they could help you get into a more affordable vehicle if you qualify.

Finding a subprime lender can be as simple as completing our free auto loan request form. Here at Auto Credit Express, we work to match borrowers to dealerships with bad credit lending resources in their local area, at no cost and with no obligation. Get started today!

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How to Avoid a Prepayment Penalty When Paying Off a Loan | Pennyhoarder

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Look at you, so responsible. You received a financial windfall — stimulus check, tax refund, work bonus, inheritance, whatever — and you’re using it to pay off one of your debts years ahead of schedule.

Good for you! Except… make sure you don’t get charged a prepayment penalty.

Now wait just a minute, you say. I’m paying the money back early — early! — and my lender thanks me by charging me a fee?

Well, in some cases, yes.

A prepayment penalty is a fee lenders use to recoup the money they’ll lose when you’re no longer paying interest on the loan. That interest is how they make their money.

But you can avoid the trap — or at least a big payout if you’ve already signed the loan contract. We’ll explain.

What Is a Loan Prepayment Penalty?

A prepayment penalty is a fee lenders charge if you pay off all or part of your loan early.

Typically, a prepayment penalty only applies if you pay off the entire balance – for example, because you sold your car or are refinancing your mortgage – within a specific timeframe (usually within three years of when you accepted the loan).

In some cases, a prepayment penalty could apply if you pay off a large amount of your loan all at once.

Prepayment penalties do not normally apply if you pay extra principal in small chunks at a time, but it’s always a good idea to double check with the lender and your loan agreement.

What Loans Have Prepayment Penalties?

Most loans do not include a prepayment penalty. They are typically applied to larger loans, like mortgages and sometimes auto loans — although personal loans can also include this sneaky fee.

Credit unions and banks are your best options for avoiding loans that include prepayment penalties, according to Charles Gallagher, a consumer law attorney in St. Petersburg, Florida.

Unfortunately, if you have bad credit and can’t get a loan from traditional lenders, private loan alternatives are the most likely to include the prepayment penalty.

Pro Tip

If your loan includes a prepayment penalty, the contract should state the time period when it may be imposed, the maximum penalty and the lender’s contact information.

”The more opportunistic and less fair lenders would be the ones who would probably be assessing [prepayment penalties] as part of their loan terms,” he said, “I wouldn’t say loan sharking… but you have to search down the list for a less preferable lender.”

Prepayment Penalties for Mortgages

Although you’ll find prepayment penalties in auto and personal loans, a more common place to find them is in home loans. Why? Because a lender who agrees to a 30-year mortgage term is banking on earning years worth of interest to make money off the amount it’s loaning you.

That prepayment penalty can apply if you want to pay off your loan early, sell your house or even refinance, depending on the terms of your mortgage.

However, if there is a prepayment penalty in the contract for a more recent mortgage, there are rules about how long it can be in effect and how much you can owe.

The Consumer Financial Protection Bureau ruled that for mortgages made after Jan. 10, 2014, the maximum prepayment penalty a lender can charge is 2% of the loan balance. And prepayment penalties are only allowed in mortgages if all of the following are true:

  1. The loan has a fixed interest rate.
  2. The loan is considered a “qualified mortgage” (meaning it can’t have features like negative amortization or interest-only payments).
  3. The loan’s annual percentage rate can’t be higher than the Average Prime Offer Rate (also known as a higher-priced mortgage).

So suppose you bought a house last year and then wanted to sell your home. If your mortgage meets all of the above criteria and has a prepayment penalty clause in the mortgage contract, you could end up paying a penalty of 2% on the remaining balance — for a loan you still owe $200,000 on, that comes out to an extra $4,000.

Prepayment penalties apply for only the first few years of a mortgage — the CFPB’s rule allows for a maximum of three years. But again, check your mortgage agreement for your exact terms.

The prepayment penalty won’t apply to FHA, VA or USDA loans but can apply to conventional mortgages — although the penalty is much less common than it was before the CFPB’s ruling.

“It’s more of private loans — loans for people who’ve maybe had some struggles and can’t qualify for a Fannie or Freddie loan,” Gallagher said. “That block of lending is the one going to be most hit by this.”

How to Find Out If a Loan Will Have a Prepayment Penalty

The best way to avoid a prepayment penalty is to read your contract — or better yet, have a professional (like an attorney or CPA) who understands the terminology, review it.

“You should read the entirety of the loan, as painful as that sounds, because lenders may try to hide it,” Gallagher said. “Generally, it would be under repayment terms or the language that deals with the payoff of the loan or selling your house.”

Gallagher rattled off a list of alternative terms a lender could use in the contract, including:

  • Sale before a certain timeframe.
  • Refinance before a term.
  • Prepayment prior to maturity.

“They avoid using the word ‘penalty,’ obviously, because that would give a reader of the note, mortgage or the loan some alarm,” he said.

If you’re negotiating the terms — as say, with an auto loan — don’t let a salesperson try to pressure you into signing a contract without agreeing to a simple interest contract with no prepayment penalty. Better yet, start by applying for a pre-approved auto loan so you can get a pro to review any contracts before you sign.

Pro Tip

Do you have less-than-sterling credit? Watch out for pre-computed loans, in which interest is front-loaded, ensuring the lender collects more in interest no matter how quickly you pay off the loan.

If your lender presents you with a contract that includes a prepayment penalty, request a loan that does not include a prepayment penalty. The new contract may have other terms that make that loan less advantageous (like a higher interest rate), but you’ll at least be able to compare your options.

How Can You Find Out if Your Current Loan Has a Prepayment Penalty?

If a loan has a prepayment penalty, the servicer must include information about the penalty on either your monthly statement or in your loan coupon book (the slips of paper you send with your payment every month).

You can also ask your lender about the terms regarding your penalty by calling the number on your monthly billing statement or read the documents you signed when you closed the loan — look for the same terms mentioned above.

What to Do if You’re Stuck in a Loan With Prepayment Penalty

If you do discover that your loan includes a prepayment penalty, you still have some options.

First, check your contract.

If you’ll incur a fee for paying off your loan early within the first few years, consider holding onto the money until the penalty period expires.

Pro Tip

If you don’t have a loan with a prepayment penalty, contact your lender before sending additional money to ensure your payment is going toward principal — not interest or fees.

Additionally, although you may get socked with a penalty for paying off the loan balance early, it’s likely you can still make extra payments toward the balance. Review your contract or ask your lender what amount will trigger the penalty, Gallagher said.

If you’re paying off multiple types of debt, consider paying off the accounts that do not trigger prepayment penalties — credit cards and federal student loans don’t charge prepayment penalties.

Tiffany Wendeln Connors is a staff writer/editor at The Penny Hoarder. Read her bio and other work here, then catch her on Twitter @TiffanyWendeln.

This was originally published on The Penny Hoarder, a personal finance website that empowers millions of readers nationwide to make smart decisions with their money through actionable and inspirational advice, and resources about how to make, save and manage money.

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10 things you didn’t know will help you get a mortgage

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Anyone who wants to apply for a mortgage right now will know that it’s not easy. Coronavirus has made the process of applying longer, while lenders are now more careful than ever about who they will lend to. You probably already know that having a healthy credit score is essential to a successful mortgage application, but how can it be achieved? Personal finance experts from Ocean Finance  weigh in with the top tips for making sure your application is a success – that you may not have heard about. 

1. Make sure your name is on all household bills

If you share a rental, it can be tempting to let someone else put their name down on the utility bills and just pay them back. If you want a mortgage, avoid doing this: bills with your name and address on them are proof that you pay them on time. This especially applies to the rent itself – never move into a house share without your name being on the contract. Before applying for a mortgage, ask your landlord for a letter confirming that you pay on time. 

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