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KNOW THIS BEFORE CO-SIGNING AN AGREEMENT IN INDIA

INTRODUCTION

So, do you find yourself all geared up for that lease? That descent apartment with the community of your choice. Oh yes! The one you’ve been bookmarking ever since you’ve had your first pay cheque. But are you really good to go? What about your credit? If you have the same question in your head then Co-signing is the answer.

A co-signer basically is a person who is meant for the rental payments if the tenant is unable to make the payment. They are the ones responsible for the lease agreement as they are the ones signing. So if the tenant stops paying the rent then they will be held fully responsible. A big portion of the problem for the Landlord is the payment of the rentals by the new tenants. So in order for a Landlord to secure timely rental payments Co-signer agreement can be very beneficial. As per recent trance data, the rent payment problem is a landlord’s number one matter of concern, and a valid reason for this is the credit history of new tenants. It is nothing like a joint loan in which two borrowers have equal access to the loan, in a co-signed loan, the co-signer doesn’t have any right to the money, regardless of the fact that they can be hooked for repayment.  

WHY CO-SIGNING AN AGREEMENT?

One of the common reasons to worry among the landlords is the creditworthiness of a new tenant, and contrary to the landlord the tenant also has to worry about the timely payment of rent. So, if a landlord is hesitant to let out his/her premises on a rental basis and/or if a tenant desire to occupy the premises, then Co-signing is the ultimate cure, and a co-signer is the doctor.[1]

PROS:
  • Since the offer of interest rate is based on the borrower’s credit risk, the inclusion of a co-signer increase the chances repayment of the loan and this is why the lenders feel confident to offer loan at better rates. Sometimes a borrower isn’t going to qualify at all. But by the inclusion of a co-signer, he’ll be able to access the loan. 
  • When someone is purely alien to credit or they’re in a stage of building their finances.
  • A co-signer can potentially lower down your rate of interest. Your rate of interest could be greatly improved by bringing a co-signer into light who has a better credit profile than yours.
  • A co-signer need not be forever if you made consecutive, on-time payments for three years at Common Bond, the co-signer can be released on your request.
CONS:
  • Your borrowing power has a limit as it will be the potential creditor who will decide whether or not to lend money by checking your existing debt-to-income ratio. It depends on how much debt you already have and the addition of the cosigned loan on your credit report may make it look as if you have more than you could handle, which acts as a hurdle because it can easily shy away from you as a borrower.
  • Your credit scores can be lowered very easily by cosigning because the debt that shows up on your credit reports may not be yours but it is showed in a way as they are your own. Your credit score will be affected by any late or missed payment. The information goes to your credit report if you are stopped being paid by the borrower. As a result, altogether it is recorded in your credit report.
  • Co-signing is not only about lending your good credit reputation to help someone but rather is a promise to pay their debt obligations if they are unable to pay, this may include any late fees or collection costs.
  • There are times when there is a failure of payment on time to the lender. They can try securing money from the co-signer before going after the primary borrower, according to the Federal Trade Commission. And it won’t be surprising to see yourself sued for the recovery of money. It may also include attorney’s fees.
HOW CAN THE LEASE BE VALID WITHOUT A CO-SIGNER SIGNATURE?

The need for a co-signer on a lease is to have a second party responsible for the lease besides the main occupant and primary signer. If a person has signed the lease and it was not subject to having a co-signer on it to be valid and effective under its express written term, you have a valid lease agreement.

However, if a person is a minor while signing the lease, then the lease probably can deem to be voidable and not be obligated under it.

DOES CO-SIGNING A LOAN BUILD CREDIT?[2]

Being a co-signer can build your credit in these ways:

  • It’s good as long as the payments are made on time, it is added to your payment history. Although, if you have a reasonable credit score and a well-established credit, the effect may be less in comparison with the danger to score if the borrower doesn’t pay.
  • It is also beneficial if your credit mix improves. It is useful to have both instalment loans.

The person co-signed by you can build their credit score in these ways:

  • It proves to be very helpful for a co-signer to qualify for credit they otherwise would not acquire, boosting a thin credit file.
  • Making an on-time payment on the account build up a good payment history.

How to protect your credit if you co-sign a loan?

You should always ask about what your right and responsibilities are before co-signing and how you’ll be notified if there is any payment issue. To track payments you should ask the primary borrower for access to the loan account. It isn’t the trust issue!

ALTERNATIVES TO CO-SIGNING A LOAN[3]

If you don’t want to co-sign a loan, there are some alternatives to it available for the borrower:

Apply for a bad credit loan: A bunch of online lenders is available who specifically work with those who have bad credit. The requirements are pretty loose as that of a bank and will evaluate other factors besides credit score. However, the interest rate is typically above 20% p.a. if you have bad credit.

Offer collateral: Big-ticket items can be offered by a borrower like home, car or investment or savings account as collateral on a loan. This is known as a secured loan and comes with its risks. If the borrower fails to make the payments on the loan, they just might come to lose whatever they’ve been pledging.

Trying a family loan: In a family loan the borrower can have a family member co-sign for them, they can opt for a family loan instead. This kind of loan doesn’t include any third-party lender, so there isn’t a need for a formal application or approval process, but a notarized, written agreement between both parties specifying the terms. If a borrower is in a need of a cheaper loan then family loans can help a borrower in a good way. Nonetheless, they put another person’s finances at risk.    

CONCLUSION

Before you co-sign, find out what your rights and obligations are, as well as how you’ll be notified if there are any payment concerns. In addition, Byrke Sestok, a certified financial planner at New York-based Rightirement Wealth Partners, recommends requesting access to the loan account from the principal borrower so you can follow payments. Sestok argues, “It’s not a trust issue; problems happen.” “You can do something about it if you find out in the first month that someone is having difficulty [paying back the loan].” Establish a contract between the co-signer and the borrower upfront and in writing that spells out expectations for each participant, according to McClary.

Author(s) Name: Shubhanshu Pandey (Prof. Rajendra Singh University)

References:

[1] Amrita Jayakumar, Jakie Veling, ‘Co-Signing an Agreement’  https://www.nerdwallet.com/article/loans/personal-loans/3-bad-reasons-to-co-sign-a-loan accessed 15 August 2021.

[2] Will Co-signing hurt credit score, https://www.bajajfinserv.in/home-loan-does-co-signing-affect-credit-score accessed 15 August 2021.

[3] Alternatives to Co-Signing, 29 June 2018,  https://www.financialfinesse.com/2018/06/29/alternatives-to-co-signing/ accessed 15 August 2021.

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