Co-signing for Somebody's Loan? What all you Need to Know.

It is a genuine need to take a loan from the bank or other financial institution, but borrowers need a co-borrower to get the loan amount authentically in the case of co-borrowing. Why do borrowers need a co-borrower to get a loan amount, which will be paid by the borrower in the future, and what must the co-borrower know before co-signing a loan for someone else? It is worth describing and in this article, you will get the best answer to all these questions, but firstly it is essential to define co-borrower and borrower.

Who are the borrower and co-borrower?

A borrower is a person who wants to take a loan from the bank or financial institution, but due to false transactions and lack of money, he needs a co-borrower as an assurance.

A co-borrower is a person who has a handsome credit amount in his account and takes responsibility for his relative's (borrower) loan as a guarantee.

Difference between borrower and co-borrower

There are some differences between borrower and co-borrower, which are as follows –

A borrower is liable to pay the loan amount at a specific time. In contrast, the co-borrower is responsible for giving a guarantee to the borrower and signing the agreement with the borrower.
If the borrower fails to pay back the loan amount, the co-borrower will pay all the amount.
The co-borrower is at a high risk of paying the loan amount if the borrower does not pay it back, but the borrower may lose a great relationship with the co-borrower.

However, the borrower and co-borrower co-sign the loan agreement, but the bank or financial institution firstly checks the Co-borrower's credit history.

Things You Should Know Before Co-Signing a Loan for Someone Else

When someone becomes properly corrupted and has low credit in their accounts, then he can choose his co-borrower. It could be the borrower's relatives, friends, and colleagues.

A co-borrower can help the borrower to get the loan, but both have the same responsibility to pay the amount. If the borrower fails to pay the loan amount back, the co-borrower must pay the whole amount alone. So, the co-borrower needs to think twice before co-signing the agreement because it contains financial risk. Some tips that a co-borrower should follow before lending support for loan approval to his/her borrower with his guarantee are as follows-

1. The destructive impact on your credit score

When the borrower and co-borrower co-sign the loan agreement with the borrower, it indicates some risks. When borrowers refuse to pay back loan instalments, there are high chances of increasing the financial risk for the co-borrower. This financial debt reflects in the co-borrowers account and affects the credit score, affecting the creditworthiness.

2. Ethical responsibility of loan

Co-signing the loan agreement with the borrower can make the co-borrower an equal companion for repaying the loan. The non-repaying borrower can give you more trouble, and it can cause a financial burden on the co-borrower. The condition will worsen when both the borrower and co-borrower have no financial backup. So, if the co-borrower can take quick action in financial crises during the loan period, he can pay for it.

3. Spoil the personal relationship

Making a co-borrower from among relatives can lead to spoiling relationships. It can happen when the borrower denies repaying the loan amount and the co-borrower as co-signer has to pay all the amount. It makes the co-borrower defaulter and forces him to pay the loan amount. During this process, arguments make this condition worse and the relationship at stake.

4. Decrease the chance of more borrowing

Refusal by the borrower to pay loan amount can lead co-borrower in debt and make him unable to borrow more money. Co-sign with a fraud person makes co-borrowers pockets tight. The loan interest amount can impact the Co-borrower's income and restrict him to borrow more loans for his personal use.

When should the co-borrower need to agree before co-signing for a loan for someone else

1. When you ensure the loan repayment

When one person requests another person to co-sign the loan agreement, they both may know each other. Naturally, both know their financial condition. So, it is quite important to know the financial situation of the borrower and co-borrower. If the co-borrower ensures that the borrower repays the loan amount without any obstacle, the co-borrower can co-sign the agreement papers for the grant loan.

2. If the co-borrower is ready to take the loan burden

The co-borrower should co-sign the loan agreement if he/she can take the risk of all loan amounts. The co-borrower should understand all conditions and risks before co-signing the agreement papers.

3. If a co-borrower wants to help someone

In many cases, people like to help someone who needs money. The co-borrower should keep the feasible amount in his/her account to bear financial risk. In such cases, the co-borrower should carry an extra amount in his/her account.

How to get rid of a co-signed loan agreement

It is harder to get out of a co-signed loan agreement than to enter it. If the co-borrower enters into a co-signed agreement, it means the co-borrower is attached to the loan payment. If the borrower pays off all amounts, then this co-signed loan agreement will be cancelled. The co-borrower and borrower will go on their respective paths.

Although co-signing loan agreements depends on the personal relationship, it can make it possible that borrowers respect their relationship and pay the amount timely. Of course, if the borrower denies repaying the amount, his relation with the co-borrower will also be affected. This situation not only spoils the credit history but also affects the borrower and co-borrower. It directly transfers the responsibility of the borrower to the co-borrower to pay back the loan amount.

Conclusion

In many cases, borrowers can be young people or students that need money for their education. Usually, they have no credit score. These students and young people choose a co-borrower that is older and more experienced. In typical cases, before co-signing the loan agreement, the co-borrower should be clear on the risk of debt. During the co-signing process, the bank suggests the co-borrower retain the credit amount in their account for future security. The main difference between borrowers and co-borrowers is that they can pay the amount to secure their relationship.

Also read:

1) What is a business loan? How to apply for a business loan?
2) Home Loan: Steps to apply, Best Interest Rates on Home Loans & more
3) What is Business Loan? A Complete Guide.
4) How To Get Small Business Loan From Government?

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FAQs

Q. Can I remove the co-borrower without repaying the loan?

Ans. Yes, it is possible to remove the Co-borrower's name from the agreement without repaying the loan. Although a bank or financial institution asks the borrower to qualify themselves to take the loan or fulfil all terms that the co-borrower has done before co-sign the loan agreement.

Q. Does the co-borrower have to pay if the borrower dies?

Ans. It depends on the situation. If the borrower dies between the loan repayment time, then his family will be liable for that. If the family does not have enough finances to repay the loan, the co-borrower should pay for it because he/she is the co-borrower of the loan. At the time of co-signing, you give a guarantee to repay the loan if the borrower fails to repay or dies.

Q. Can the co-borrower get the title of the borrower's property?

Ans. No, when the borrower and co-borrower co-sign the legal agreement, the latter is only liable to repay the amount if the borrower fails to pay it back. The co-borrower will not get any title on the borrower's property on behalf of the loan amount.

Q. What is the reason that the borrower can't qualify for the loan?

Ans. Sometimes, a young person or student can't qualify for the loan because they start with zero credit. In other cases, the borrower has less income and wants to do something new. It all depends on the situation. So, the co-borrower should investigate all aspects and, after that, co-sign the loan agreement.

Q. What questions should the co-borrower ask the borrower before co-signing the loan agreement?

Ans. If a person does not qualify for the loan in his capacity, he will ask their loved one to co-sign the loan agreement. Indeed as a co-borrower, you have to give a guarantee on his credit. As a co-borrower, you should ask some questions from the borrower before co-signing the agreement for the loan. These are as follows –

Reason for taking the loan.
Amount of loan
Why does a bank or financial institution need a co-borrower?
When will the borrower repay the amount?
Backup plan for the payback loan amount.