Sunday, June 3, 2012

ASK THE MONEY GUY: Do I need a Cosigner or Not?

You know it and I know it as well, we are all assigned a credit score based on our existing debts.  Some individual’s credit score are high and others are simply low.  When in the process of getting a vehicle loan the concern is whether or not you need to get a cosigner.  Some factors that may lead to the need of a cosigner are a low credit score, no credit history, or a high debt/income ratio. 

Banks look at a low credit score as a risk factor; the risk factor is associated with the paying back of the loan amount.  Not that the banks do not trust you, it is the probable assumption that you may become a red flag/collections issue in the near future of the loan.  Not having any credit history is exactly what it credit history.  Banks need to see a pattern in your payment history of previous loans such as student loans, credit cards, etc.  Without credit on file, it does not give banks an idea of what type of risk factor you may or may not be.  The debt/income ratio is typically a percentage that banks go by for each individual where they take the total of your monthly debts and divide it by the total of monthly income to get a risk percentage.  Thirty percent is the maximum a bank will allow an individual’s ratio to fall upon; generally anything above that number is a high risk factor.  These few factors will all have your bank denying you a loan for a vehicle. 
Fortunately, a cosigner can save the day and back you up to potentially help strengthen you in the eyes of the bank.  Having a cosigner on the loan allows for the bank to use the credit score and history of the cosigner to your advantage.  Now the cosigner does except the responsibility of the loan if it happens to default, but if you pay on time throughout the life term of the loan then your credit score will greatly improve and most likely the next time you need a loan you can get one without the extra help of a cosigner.


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