When a borrower has poor credit or a limited credit history, she may be unable to acquire an automobile loan without a cosigner. While cosigning a loan may benefit the borrower, it has very limited benefit -- but significant risk -- to the cosigner.
The benefits and burdens of obtaining or cosigning a loan are outlined in the Uniform Commercial Code and are not specific to an individual state. However, the Texas Office of the Attorney General explicitly lists warnings of the risks posed to the cosigner.
Indication of Risk
If a cosigner is needed, it is an indication that the borrower does not satisfy basic credit or income standards prescribed by the lender. According to the Federal Trade Commission, nearly three out of four cosigners eventually repay the loan because the original borrower defaults.
Benefit to the Cosigner
The benefit of cosigning a loan is the feeling of helping someone in need. Parents and other relatives may cosign for a young family member with a limited credit history. If all goes well, one family member may feel grateful that he had the opportunity to help another. A cosigner does not enjoy any of the benefits of owning the vehicle; the cosigner's name does not appear on the vehicle title or registration.
Liabilities of the Cosigner
The Texas Office of the Attorney General has authored a brochure detailing the risks of cosigning for any type of loan. When an individual cosign for a loan, he guarantees repayment of the entire debt amount. Should the borrower fail to make payments, the lender may seek recourse from the cosigner. If the lender sues the borrower for nonpayment, the cosigner will also be held legally responsible for the debt.
Effect on the Cosigner's Credit
If the borrower does not make timely payments, this will be reported on the credit report of both you and the borrower. Lenders consider a cosigned loan a component of your total debt load; a high debt load relative to income may make it difficult for you to obtain additional credit.
Benefits to the Borrower
The original borrower does not expose herself to increased liability by having a cosigner; cosigned loans can be a benefit to the borrower. Cosigned loans can help a borrower with damaged credit or a limited credit history to secure an automobile loan at a lower interest rate than he could obtain independently. If the borrower has bad credit, a history of timely payments on the cosigned loan can help to rehabilitate her credit.
0 comments:
Post a Comment