What Is a Secured Loan?
While an unsecured loan, like those with credit cards, offers you money only in exchange for interest payments, a secured loan holds an asset as collateral in case you do not pay. For example, when you take out a loan to purchase a vehicle or home, you sign the deed or pink slip over to the lender until you pay it off. If you do not make payments, your loan goes into default and allows the lender to repossess your car or place the home in foreclosure.
Co-Signer's Role
A co-signer is required when the borrower does not have a good enough credit score or high enough verifiable income to be approved for the loan on her own. The co-signer agrees to take equal responsibility for the loan, not only offering his good credit score and income for loan approval but also agreeing to pay back the loan if the borrower defaults. Co-signers are typically family members hoping to help their loved one improve her credit.
Best Possible Outcome
If all goes well, the co-signer will be a co-borrower in name only. The original borrower pays back the loan on time and in full, which improves both the co-signer's and borrower's credit scores, as well as going on both credit histories. This outcome is unfortunately not as common as co-signers hope, though it does happen. If borrowers repay the loan without the co-signer's assistance, late payments are common and can ding the co-signer's credit score as well as the borrower's.
Less Positive Outcomes
The downside for a co-signer is helping a borrower who defaults and disappears. This leaves the co-signer completely responsible for either paying back the loan or allowing the lender to repossess the collateral used to secure the loan. Allowing a repossession or letting a property go into foreclosure will seriously damage the co-signer's credit score and history.
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