Having a co-signer added to a debt application is a good way to build credit and get a better rate on a loan application. That being said, because of the way in which the co-signer is still jointly responsible for the loan payments being made, it is important to take a couple of steps in advance to make sure there everyone is comfortable with the situation.
There’s nothing worse than a nosy co-signer that’s constantly bothering about whether or not a loan payment will be made on time, or the awkward situation that arises when a co-signer is declined for a loan of their own because the bank wants to wait for the co-signed loan to be paid out before forwarding new funds. While having a co-signer does allow the the borrow to avoid loans for people with bad credit ground rules need to established.
The best way to avoid awkward confrontations with a co-signer is to establish a couple of upfront rules that will help to provide transparency and reassurance that the payments are being made on time, and that the co-signer’s credit score is not in jeopardy. A simple way to do this is for the primary loan applicant to make advanced payments on the loan, and to provide the co-signer with the receipts to show that payments are being made. This provides evidence that loan payments will never be late, and provides a level of accountability for the payments from the records.
Alternatively, the borrowers could set up a joint checking account that is used exclusively to pay the debt in question. This allows the co-signer to check up on the payment history through online banking, and to jump in and deposit funds that will save their credit score for when it looks like the primary applicant might miss a payment. Again, this provides the co-signer with peace of mind through the sheer transparency of the agreement.
While it is always a good idea to plan ahead on the ways in which a co-signer will be provided with a level of transparency and accountability that assures them of the integrity of their application, many people forget that there is one more awkward situation that can arise during a co-signing: a decline. The addition of a co-signer to a loan application doesn’t guarantee the approval of an application, and it can be a somewhat embarrassing situation for a co-signer to see that a loan application has been declined because they are not strong enough to support the requested amount.
Worse yet, there are some situations where the addition of a co-signer can make an application worse off, to the point at which the primary borrower is better off on their own. This becomes particularly awkward for borrowers that have their parents as co-signers, because they are placed in a position where they realize that their parents are possibly in a financially distressed position. The best way to avoid this sort of situation is to respect the privacy of the financial information that is being presented by both signers.
This can be accomplished by having both applicants fill out their financial information privately, or by having a discussion with the lending banker in advance about the lending criteria that is needed to support a debt application. In taking away this information, a co-signer can privately look at their financial situation and determine if they would be strong co-signer on their own.
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