A co-signer is a second party who guarantees to repay the loan and usually becomes involved when the primary borrower has no or a poor credit history. Students often have few or no credit cards, no car loans and very rarely a home mortgage loan. As a result, they have little or no credit history at all. And, as is the case with many of us in our youth, they may have made some unwise choices.
They may have gone beyond what they could repay on a credit card and even been irresponsible about making payments. That lack of credit history or, worse, actual late payments or defaults can easily put a potential borrower into the high-risk category. Loan officers, even in Federal student loans programs, will often look at that with a cautious eye.
Loan applications may be denied, or in borderline cases, a higher interest rate is charged to offset the risk and compensate for higher default rates. To counteract that lack of credit history or poor record, borrowers can and usually should obtain a co-signer. In the average case that will be one or both parents.
Loan officers will look then at the parent’s FICO score, outstanding debt to income ratio, repayment history and other standard factors in deciding whether to grant the loan. At the same time, the credit quality of the parents becomes the primary factor for deciding the interest rate assigned.
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