Q: Over the years, I have co-signed for a number of loans for my children. On one occasion, I needed to contact the lender to get a loan document and I was surprised how difficult it was for me, as the co-signer, to get access to documents directly from the lender. I needed to have the primary borrower get the documents. It seems odd that the co-signer is equally liable for the loan but does not have equal access to the documentation.
Most recently, I was a co-applicant for my daughter’s car loan. What is the difference of being a co-signer and co-applicant and is there an advantage of either type of loan? Specifically, I am curious how each type of loan impacts the primary borrower’s credit rating, how the secondary borrower’s debt-to-income ratio is affected and the secondary borrower’s ability of get loan information and documents.
Also, I’m curious about a situation when the primary borrower fails to make payments and the payments are assumed by the secondary borrower; does the credit rating of the primary borrower suffer? Do the credit agencies even get notified when this situation occurs?
M.S., Chagrin Falls
A: In general, the biggest difference between a co-borrower/co-applicant and a co-signer is rights to or ownership of the property.
In both cases, the second signer is legally responsible for the loan. But a co-signer doesn’t have equal rights to the property. A co-applicant or co-borrower has equal ownership in the property. Think of a co-applicant as a joint applicant.
Co-signers are generally requested when the primary borrower doesn’t have a good enough credit score — perhaps because of a short credit history or some dings in her credit. Or perhaps the primary borrower doesn’t have enough income.
I would agree with you that I would think as a co-signer you could get access to loan documents on request, without requiring the primary borrower’s permission.
If the primary borrower stops making timely payments on a loan, it can hurt the credit score of anyone whose name is on the loan as a co-signer, co-borrower, co-applicant, whatever. However, if the co-signer is notified before it goes into serious default and gets the payments back on schedule, then it may not hurt everyone’s credit history.
Lenders generally notify credit bureaus if an account falls more than 30 days’ past due.
Any loan or credit card that you sign for will affect your debt-to-income ratio. A future lender would have to account for the possibility that you may have to make those payments.
My simple advice if you’re ever co-signing for a loan: You make the monthly payments and have your relative or friend repay you every month. That way you don’t to worry about your good reputation being tarnished by someone else’s issues.
Q: I am an independent insurance agent in Medina. I read Sunday’s column about gap insurance with interest. https://www.cleveland.com/moneymatters/2019/03/man-wrecks-bmw-cashes-24000-check-issued-erroneously-by-progressive-to-him-instead-of-his-lender-money-matters.html
One important point when you’re buying a car: sometimes a finance manager will talk you into buying gap insurance for $200 to $400 without letting you know that the same gap policy can be added to your auto insurance policy by your existing insurance company for $20. Within the last two years I have had several customers who purchased gap at the dealership without calling me first. Luckily we were able to have dealer’s gap policy deleted and premium balance deducted from total loan amount.
A: Thanks for this reminder that we can share with readers. I actually ran into this last fall when my husband bought a new car. The dealership tried several times to talk us into adding gap insurance to the financing and suggested its policy was better than the one through my insurer. Nope. It was just about six times more expensive.