Private Loans With No Cosigner
Borrowing and lending are extremely common and straightforward elements of our financial system and economy. When it comes to borrowing private loans to cover education costs, there are three parties involved: the borrower, the lender, and commonly, a co-signer. Because most college students either have no credit history or a very limited one, lenders are highly unlikely to lend students money, unless they have a cosigner.
When a potential borrower has little or no credit history, in the eyes of a bank, that person doesn’t seem like a good lending risk. In these cases, the bank might ask the person to find a cosigner with a strong credit history. For students, parents or guardians commonly serve as cosigners, as they generally have strong credit histories and are able to take on the responsibility for the loan if the student borrower is unable to meet the payback requirements.
A Common Request
Student loans in the private market often require cosigners. In fact, the Consumer Financial Protection Bureau suggests that some 90 percent of private loans disbursed in 2012 required cosigners. It’s good news for students, as a cosigner can help these students to get the credit they need so they can obtain the loans that can fund their education. However, they’re not the only option open to students.
Federal loans and grants are available to all students who need them, regardless of a student’s credit history or need, and no cosigner is required. A student can simply ask for assistance with this type of loan and see that request fulfilled in no time at all. Regardless of your credit history or your access to a cosigner, you should pursue federal student loans and grants before considering private student loan options: they are more widely available, have more favorable terms to borrowers, generally lower interest rates, and do not take creditworthiness into account.
Federal loans come with borrowing limits, however, and some students max out their eligibility for a given semester before fully covering all of their education costs. These students still need financial assistance, but they might not be able to get it without their parents.
Having a cosigner, as we mentioned before, is very important and helpful when a student applies for a private student loan. Having a credit-worthy co-signer allows a student to receive a private loan that might be denied if the student applied on his or her own. But there are some drawbacks for parents who agree to help their children, including:
- Lowered credit scores, due to lowered debt-to-income ratios
- Decreased ability to get loans
- Risk of paying the loan if the child dies
- Risk of paying the loan if the child defaults
If a student defaults on their debt and sticks his or her parents with the balance, cosigning parents can become worried about their repayment plans and remorseful that they signed on the loan in the first place. As an article in Bankrate.com puts it, in the worst case scenario, cosigning on a loan can damage a relationship if the original borrower defaults on the loan and does nothing to help with repayment.
These situations can be avoided if students and their parents create a repayment plan, and are thorough about how they intend to manage repaying the effectively shared debt. If a private loan seems right for you, either with a cosigner or without, we’d like to help you compare and get ready for paying back your debt responsibly.
Types of Student Loans