Top 5 Reasons Why You Shouldn’t Co-Sign a Friend’s Loan – SmartAsset
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Co-signing your friend’s loan might seem like a nice thing to do. But it can put many things in your life at risk, including your finances, your credit score and even your friendship. While it’s possible to co-sign a friend’s loan and never face any negative consequences, it might not be worth it. Check out five reasons why you shouldn’t co-sign a friend’s loan.
1. You’ll Be Responsible for the Loan
No matter how trustworthy or wonderful your friend may be, he might end up defaulting on the loan he took out. Anything could happen. Your friend could lose his job or find out that a relative needs help paying for medical treatment.
If your friend can’t pay back the money he borrowed, you would have to pay for the loan if you co-signed it.
2. Your Credit Could Take a Hit
If you co-sign a friend’s loan and he misses a single loan payment deadline, your credit score could drop. If that happens, it might be harder for you to buy a house or get a low interest rate on a loan in the future.
If your friend fails to pay back whatever he owes, the lender might sue you first. In the lender’s eyes, you are far more likely to pay back the loan since your credit score is probably higher.
3. Your Property May Be at Risk
Sometimes a co-signer will secure a loan with his or her own property. If you (the co-signer) put up your car or house as collateral and your friend doesn’t pay back the loan, you could potentially lose your property.
4. You Could Destroy Your Friendship
If you’re forced to cover the cost of the loan you co-signed, you could end up resenting your friend. After all, it can be difficult to remain friends with someone who put you in a complicated financial situation.
5. It Could Be Harder to Get a Loan Later On
Co-signing your friend’s loan could make qualifying for another loan more difficult. For example, if you co-sign your friend’s car loan and then you try to take out a personal loan, a lender might reject your application. Co-signing your friend’s loan will affect your debt-to-income ratio (the amount of debt you’re paying off compared to your monthly gross income). A lender might not want to lend money to someone who already has a lot of debt to pay off.
Sarah Fisher
Sarah Fisher has been researching and writing about business and finance for years. She has worked for the Consumer Financial Protection Bureau and her work has appeared on Business Insider and Yahoo Finance. Sarah has a bachelor’s degree from Georgetown University and is from New York City. When she isn’t writing finance articles, she dabbles in animation and graphic design.
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Last week I was in Athens, GA guest lecturing at the University of Georgia . I’m up there once a semester speaking with senior students who are about to graduate and go out into the “real” world. And while my agenda is to talk about credit reports, credit scores, and how the whole financial services system works, it usually ends up becoming a fairly lengthy Q&A session about how best to establish and build your credit. Here’s the deal…you have one chance to establish credit, that’s it. You can either do it the right way or the wrong way, but you can never have a mulligan. For those of you who’ve already built credit and managed it poorly (for whatever reason), you’re not going to have to build your credit; you’re going to have to re-build it. Here are some of the more common methods for each, and their pros and cons:
Opening A Secured Credit Card
A secured credit card is a legitimate credit card issued by a legitimate bank. You make a deposit at the bank and they will issue you a credit card with a credit limit equal to your deposit. Since you’ve essentially fully secured any purchases you’ll make with a cash deposit, banks are more willing to issue these cards to either new credit users or those who are trying to rebuild their credit. Additionally, you can open a secured card for as little as a $250 deposit, so it’s a nice option for people who have limited cash flow. Secured cards aren’t a good long-term option,however; the fees associated with these cards and the interest rates aren’t very good. But, you have to remember that you’re opening the card for a purpose and that purpose is to get something good on your credit reports. After a few years of paying the bills on time you may be able to convince the card issuer to convert the account to an unsecured credit card and refund your deposit. And because this is a credit building strategy, you’ll want to make sure you choose a card issuer who reports their secured card accounts to the credit reporting agencies. Otherwise, you’re just wasting your time.
Being Added as an Authorized User
An authorized user is someone who has been authorized to use a credit card issued to another person. Most of the time, parents will add their children to one of their existing credit cards, which allows them to have a card in their name but doesn’t convey any sort of liability for payment of the balance. The good news is that the account history is reported to the authorized user’s credit reports and can almost instantly establish them a solid credit history. This is my favorite option, as it really has no downside. I call the authorized user strategy “having a credit card with training wheels.” As long as the account is managed properly, then it’s a positive addition to your credit reports. And, this is a great option for consumers who have limited (or zero) cash flow or are already working hard to get out of debt. If the account is mismanaged by your parent (or spouse, as this is also common among spouses) then all you have to do is ask that your name be removed from the account and it will also be removed from your credit reports. In fact Experian, one of the major credit reporting agencies, will automatically remove the account history from the authorized user’s credit report if it becomes derogatory, “because an authorized user has no responsibility for repayment of the debt”, according to Rod Griffin, Experian’s Director of Public Education. “We will also remove the account at the request of the authorized user.” The good news for authorized users is that the FICO scoring system gives you full benefits for a properly managed authorized user account on your credit report, as long as you have a legitimate relationship with the primary cardholder. A few years ago, credit repair companies were trying to take advantage of the authorized user strategy to boost the credit scores of consumers who had bad credit. FICO figured out a way to filter out the consumers trying to game the system, so they won’t get the same benefit as a legitimate parent/child or husband/wife relationship.
Co-signing For a Loan
Co-signing for a loan is when you sign the promissory note (the promise to pay back the loan) and accept equal liability for payments on someone else’s loan. The newly opened loan will likely end up on your credit reports and will help you to establish or re-build your credit. Co-signed loans are normally auto loans, personal loans, or mortgages. That’s where the good news ends. I don’t like this option for three reasons:
1) It’s unnecessary. You don’t establish credit any faster by obligating yourself to a huge loan than you do by opening a $250 secured credit card. Choose the path of least resistance!
2) You can’t change your mind. There is no such thing as “co-signing for credit only” although some consumers have tried to challenge this in court, unsuccessfully. When you co-sign you’re just as liable for payments as anyone else on the loan. If the payments start being missed, it’s your problem. You have to be prepared to make all the payments if you choose this option.
3) Missed payments will go on your credit reports. If the payments on the loan are missed then anyone who has signed for the loan (yes, including you) will have a record of those missed payments reported on their credit reports. And, if the loan goes into default any aggressive collection actions, including litigation, it will be targeted at you. I’m not a fan of co-signing for a loan EVER, unless you need two incomes to qualify for a mortgage.
John Ulzheimer is the President of Consumer Education at SmartCredit.com, the credit blogger for Mint.com, and a contributor for the National Foundation for Credit Counseling. He is an expert on credit reporting, credit scoring and identity theft. Formerly of FICO, Equifax and Credit.com, John is the only recognized credit expert who actually comes from the credit industry. The opinions expressed in his articles are his and not of Mint.com or Intuit. Follow John on Twitter.
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Whether you like flashy sports cars or practical minivans, shopping around for cars can feel like a fresh start. The problem is, most people can’t afford to pay out of pocket.
So how do you get a car loan to help turn your motorized dreams into reality? Like most big purchases, creating a thorough plan is a must. Understanding all your financing options, how a car loan will affect your credit, and how you can get the most bang for your buck will save you headaches—and debt—down the road.
Have a specific question in mind? Use the links below to get straight to the information you need:
What Are the Steps for Getting a Car Loan?
Throughout the financing process, remember that you’re shopping for two different products: the car and the car loan. Before setting foot on a dealership, take the time to weigh all your options so you feel 100% certain that investing in a new car is the best decision for your financial health as a whole.
Start with a Budget
If you don’t have a monthly budget, it’s time to create one. Assess all the monthly debt payments you currently have—such as rent, student loans, and credit card bills—and then figure out how much you’ll be able to afford on a monthly car payment.
Your car payment calculations should include not only the amount paid back to the lender, but also gas, insurance, and maintenance fees. If you come up with a number that won’t work with your income, consider saving for a larger down payment so you won’t have to take out a large car loan.
Check Your Credit Score
Request a copy of your free credit report to determine how your score will affect the loan shopping process. When doling out the best rates, lenders look for a score of 760 or higher and will give you a better deal the higher your score. Payment history, debt-to-income ratio, and the history of your credit lines all affect that magic three-digit number.
Start by fixing any inaccuracies you find on your report that could be dragging down your score. Within a month or two, you should see the mistakes removed which may make your number rise. If you aren’t in a rush to purchase the car, work on bringing your score up to help you get more favorable loans when it does come time to apply.
If you don’t have the time or ability to raise your credit score before purchasing the car, you could find a co-signer for the loan. Consider asking a parent, friend, or family member with a good score to co-sign. It’s important to remember that the co-signer is responsible for paying back the loan if you’re unable to make the monthly payments, and the credit score of both you and the co-signer will be affected by late or missed payments.
Explore All Your Loan Options
There are two main ways to get a car loan: direct lending and dealership financing. After picking out the car you want to buy, consider which option makes the most sense for you.
Direct Lending
Direct lending entails receiving a loan from a bank, credit union, or online lender. You’ll agree on the amount of the loan and the finance charge, or interest rate, that you’ll pay on the loan. Some things to note about receiving direct lending:
Banks often offer competitive interest rates but are more exclusive about who they offer a loan to. It is more likely you will need to have a good or excellent credit score to obtain a desirable loan from a bank. You don’t usually have to be a member at the bank to apply for an auto loan or get pre-approval.
Credit unions may have an easier loan application process and lower interest rates. However, you must be a member to apply for a loan.
Online lending websites often contact several lenders at the same time so you can easily obtain competing loan offers. Just like a bank or credit union, you will determine the terms of the loan with the lender. Make sure to always do background research on each lender you contact to ensure they aren’t predatory lenders.
Dealership Financing
Some dealerships offer on-site financing, which means you agree on the loan amount and interest rate with the dealer. Here are some things to keep in mind:
The dealer will gather all your information and send it to one or more prospective auto lenders, who will then give the dealer a “buy rate.” This could be higher than the interest rate you negotiate because it could include a compensation fee for the dealer handling your loan.
Because you are treating the dealership as a one-stop-shop for all your car needs, you might be offered special deals or rebates that include low interest rates.
Get Pre-Approval
Whichever financing option you decide to pursue, don’t just take the first loan offer that comes your way. Take the time to shop around and get competing rates through the pre-approval process. This entails asking multiple lenders to look at your credit report and draft up the loan amount and interest rate they’d be willing to offer you.
Pre-approval may give you more bargaining power with a dealership than if you went in without a financing plan. You also might be able to hunt down the best deals because lenders are competing for your business. Remember, just because you receive pre-approval from a lender doesn’t mean you have to take their offer.
An important element of loan shopping is keeping your pre-approval applications and final loan applications within a short window of time. Every time a lender looks at your credit report, it triggers a hard inquiry. If you build up too many hard inquiries, it could lower your credit score.
Fortunately, Turbo uses VantageScore, one of the common scoring models, which offers a 14-day grace period. If multiple hard inquiries are made during this time period for an auto loan, it will only be counted as a single inquiry—thus protecting your score.
Negotiate the Total Cost
Once you’ve found a lender that you want to finance your car loan, consider negotiating the final deal. This includes:
Length of the loan. Typically, a shorter loan will have higher monthly payments but lower interest rates. A longer loan will have smaller monthly payments and higher interest rates.
APR and interest rate. Depending on your pre-approval offers, you might be able to negotiate for a lower interest rate. This means you’ll pay the lender less to borrow the money over the length of the loan.
Additional add-ons. Extended warranties or additional insurance can raise the total cost of the loan.
Special offers or discounts. If you’re getting your loan through a dealership, use the negotiation process to ask about any manufacturer rebates that could get you a lower price on the car, therefore reducing the amount of money you need to borrow.
Close the Deal
Before driving off into the sunset, make sure to tie up any loose ends that could impact your car loan. Per the federal Truth in Lending Act, lenders are required to provide you with important information about your agreement so you can verify all the terms match what you discussed.
Sign all paperwork before taking your new car home, and make sure you have multiple ways to contact your lender if you ever have any questions. Whether you make online or by-mail monthly payments will be discussed during the negotiation process. It’s crucial that you pay these back on time every month to avoid severe late fees or repossession of your brand new set of wheels.
Will Trading In my Car Affect an Auto Loan?
If you plan to trade in your current car before purchasing a new one, it could lower the total cost of your car loan. The credit or cash you receive from the trade-in can be put to use as a down payment, thus reducing the amount you need to borrow from a lender.
Before trading in, make sure you know whether the total amount you still owe on your car is less than what it’s worth. Carrying an old auto loan onto a new auto loan may raise your interest rates and limit your options for the best deals. While trading-in can significantly help some buyers, it may not always be the best option if you want to get a favorable loan for your new vehicle.
Can I Get a Car Loan with Bad Credit?
Despite many lenders being wary of borrowers with poor credit scores, there are still options available to obtain a car loan. As mentioned earlier, paying off any existing debt, finding a co-signer, or saving for a larger down payment are all ways to help offset bad credit.
However, if the purchase can’t wait, lenders may still offer you a loan—but likely at a high price. Interest rates and additional fees skyrocket for borrowers with less-than-ideal credit scores, and it may dig you into a deeper hole of debt than you started with.
If you think you might be late on a payment, contact your lender immediately to discuss the possibility of adjusting your payment plan. While most of the original terms you negotiate will likely stay the same, you may be able to make a delayed payment. But if you consistently default on your payments, the lender is allowed to repossess your car, sell it, and use the money to pay off your remaining debt.
Despite its complexities, getting a car loan can be a straightforward process if you make a strategic plan. Assess your current financial health, loan shop, and negotiate a deal that suits your needs; in no time you’ll be able to hit the streets with a shiny new toy and feel confident in your abilities to manage debt.
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Society is increasingly going cashless, with more people handling their finances digitally for safety and convenience. Yet despite the numerous apps and pay-as-you-go options, debit cards remain essential for transactions, paying bills, and everyday purchases.
This guide explains the basics of debit cards, giving you an overview of how to get one and how they work.
Different Types of Debit Cards
Multiple card types exist, each with a convenient way to pay for purchases. These include standard cards, prepaid cards, and EBT cards. Before you get a debit card, read below for a list of your options.
Standard Card
These debit cards link directly to your checking account, allowing you to make purchases or withdraw cash from ATMs. Modern cards come with perks like contactless payments, mobile access through online and mobile banking, and fraud protection.
Prepaid Card
A prepaid card (or pay-as-you-go cards) are cards you buy and load money into before using. You don’t have to have a bank account to use them, making them a convenient choice if you don’t have access to traditional banking services.
EBT Card
Electronic Benefits Transfer (EBT) cards are cards for government assistance programs such as the Supplemental Nutrition Assistance Program (SNAP) and Temporary Assistance for Needy Families (TANF). You can use them to make eligible purchases at participating retailers.
How much does a debit card cost?
Some banks and credit unions may charge you specific fees for issuing a physical card. When you open a checking account, you usually receive a debit card by default with no initial fee. However, in some cases, banks may charge a monthly or annual maintenance fee that covers the cost of providing and maintaining card services.
Do debit cards come with perks?
Some debit cards come with incentives, like cash back deals or reward points on certain purchases and easy mobile app control. Depending on the bank, you can redeem the reward points for cash or other items.
See also: Advantages of Using a Debit Card
How can I get a debit card?
Getting a debit card is a straightforward process if you have your documents ready. You can apply for an account online, or visit your local bank branch and apply using a teller. Here is a step-by-step guide to getting a debit card without hassles.
Step One: Open a Checking Account
Start by researching to find the best bank or credit union to open a checking account. Make sure to check whether the card comes with fees and what the bank’s terms are. Once you find one, you can visit a branch to open a checking or savings account, or you can apply for a debit card through the bank’s website.
What do you need to get a debit card?
You must have the necessary identifying and personal documents to open a checking account from a bank or credit union and get your debit card. Although some requirements differ for a checking account, you generally need the following:
A valid photo ID like a state ID, a passport, or a driver’s license
Your Social Security number or Tax ID
Proof of address, like a lease or a utility bill
A direct deposit amount that varies between banks
Joint Accounts
If you have a joint account, you need the other person’s information and for them to co sign. You can add their information online or visit a teller and fill out the application onsite.
Step Two: Request Your New Debit Card
Both your bank or a credit union may require an initial deposit to open a checking account. You can do so by depositing cash in person, transferring funds, or mailing a check.
After the institution approves your application and opens your checking account, they will give or mail you a debit card and checkbook. You must activate your card before making a purchase or a payment.
Step Three: Activate Your Card — and Start Using It
Like a credit card, you must activate your new debit card to access funds from your checking account. Although the activation process varies between banks, you can find the activation instructions in the accompanying documentation or on a sticker on the card. Keep an eye on the expiration date, use a designated in network ATM, and minimize web access to your checking account to prevent stolen cards or card lost situation.
Activate Your Debit Card
Standard activation methods include calling a designated phone number, using your bank’s website or mobile app to activate the debit card online, or through an ATM transaction. After activation, your financial institution will confirm that your card is ready.
See also: What Is the Difference Between a Credit Card and a Debit Card?
How to Get Cash from an ATM
Withdrawing cash from an ATM card is an easy process when you have your card handy. Although multiple ATMs exist, using one associated with your bank helps you avoid transaction fees.
Once you find one, insert your debit card into the card slot. The machine will then prompt you to enter your Personal Identification Number (PIN). After doing so, Select the “Withdraw” option from the main menu and choose the account you want to withdraw from.
After selecting “checking” or “savings,” enter your desired withdrawal amount and your money is ready. Always protect your card from unauthorized use and shield your number for added security.
How to Add a Debit Card to a Digital Wallet
To add cash to a wallet like Apple Pay, open the wallet app on your smartphone or device and sign into your account. Locate the “Add Funds” option and choose a funding source, like a linked bank account, debit card, or credit card. Then, enter the amount you want to add. Once you confirm the transaction, the funds transfer instantly to your digital wallet.
Do debit cards have fees?
Yes, your bank or financial institution may charge monthly service fees, monthly maintenance fees, foreign transaction fees, and ATM fees. Always ask a representative before establishing a bank account to avoid overdraft penalties for ATM withdrawals.
How can I avoid overdraft fees?
You can avoid overdraft fees by setting up low-balance or email alerts on your bank’s mobile app and monitoring your spending. You can also link your savings account or credit card for overdraft protection.
Protecting Your Debit Card
To protect your debit card, never share your PIN or card number with others. Regularly monitor your account and manage cards well to detect unauthorized charges and report suspicious activity immediately to your bank. If you have a lost or stolen card, report it immediately to the bank to protect your money.
Using Technology
Technology makes it possible to purchase, pay, and manage your debit cards and credit cards without having physical money in your hand, When paying online, use secure websites and connections for your purchase. You can also enable account alerts to notify you when unauthorized charges happen on your account. Don’t use your debit card if your PIN is visible.
What to Do If Your Debit Card Is Lost or Stolen
Report stolen cards immediately to your bank. They can block the card and prevent unauthorized transactions.
Your bank usually issues a replacement card. However, be sure to update your new card information for recurring payments or linked accounts to avoid late penalties.
Also, record the date and time you reported the theft to your bank and monitor your account if additional transactions or fraudulent activity occurs.
Frequently Asked Questions
What are the requirements to get a debit card?
To get a debit card, you’ll typically need to be at least 18 years old and have a valid checking or savings account with a bank or credit union. Minors can also get debit cards, but they’ll typically need a parent or guardian to co-sign the account.
How long does it take to receive my debit card?
Once you’ve opened an account and requested a debit card, most banks will send you the card within 7-10 business days. In some cases, you might even be able to get a temporary card right away at your local branch.
Can I get a debit card without a bank account?
Yes, prepaid debit cards are a fantastic option for those who don’t have a bank account or prefer not to link their card to one. Just load the card with funds, and you’re good to go. Here are some of the best prepaid debit cards on the market right now.
How can I choose the best debit card for my needs?
Consider factors like fees, rewards, account access, online banking, and customer service when selecting your debit card. Don’t forget to compare different banks and credit unions to find the one that aligns with your financial goals.
When you apply for a loan, you might have the option to add a co-signer or co-borrower. And while the terms are similar, a co-borrower — or joint applicant — shares ownership of the loan and assumes responsibility for payments from the start.
On the other hand, a co-signer is only liable for the loan if the primary borrower fails to make payments.
Quite a few lenders will allow co-borrowers on a loan, but co-signers are much rarer. When you apply, confirm with your lender and the other person on the loan which term applies best to avoid confusion down the road.
Get pre-qualified
Answer a few questions to see which personal loans you pre-qualify for. The process is quick and easy, and it will not impact your credit score.
What are the differences between a co-signer and a co-borrower?
The most important difference between a co-borrower and a co-signer is the degree of investment in the loan.
A co-borrower has more responsibility (and ownership) than a co-signer because a co-borrower’s name is on the loan, and they are expected to make payments. A co-signer only backs your loan and will not need to make payments unless you are unable to.
Co-signers
A co-signer agrees to take responsibility for repaying a loan if the primary borrower misses a payment. The co-signer typically has better credit or a higher income than the primary borrower, who might otherwise not get a loan application approved without the help of a co-signer.
Co-signers typically have a close relationship with the primary borrower. A co-signer is typically a parent, immediate family member or spouse.
How it works
A co-signer is a guarantor for the primary borrower. Co-signers promise to assume responsibility for repayment if the primary borrower doesn’t pay as required.
Pros of a co-signer
Adding a co-signer to a loan application could improve a borrower’s chances of qualifying and securing a lower rate. Plus, if the loan is repaid on time, it can improve both parties’ credit scores.
Risks of co-signers
Like co-borrowers, co-signers take on financial risk. Co-signers are legally responsible for paying the outstanding debt that the primary borrower fails to pay.
Who a co-signer is best for
Co-signing is typically preferable if only one of the borrowers will benefit from the loan. For example, if a young person without established credit wants a personal loan, the bank might decide that the loan is too risky unless someone with better credit agrees to share legal responsibility for repayment. A parent with good credit might agree to co-sign with the understanding that their child will pay it back.
Co-borrowers
A co-borrower, sometimes called a co-applicant or joint applicant, is a person who shares responsibility for repaying a loan with another person — and who has access to the loan funds. Applying for a loan with a co-borrower reassures the lender that multiple sources of income can go toward repayment.
Applicants with co-borrowers are more likely to receive larger loan amounts since they are viewed as less risky for lenders.
How it works
In addition to both parties being responsible for making payments toward the loan, assets that guarantee the loan — like a home or car — may be owned by both co-borrowers. Each co-borrower has equal access to the loan funds. And if the loan was used to secure property — like a vehicle — both co-borrowers will be listed on the vehicle’s title.
Pros of a co-borrower
Similar to adding a co-signer, adding a co-borrower could help a consumer secure a lower interest rate. In addition, depending on the co-borrower’s income, it might also help them qualify for a higher loan amount.
Risks of co-borrowers
The biggest risk for co-borrowing on a loan is that each co-borrower is responsible for repayment from the start. Any actions by either co-borrower that impact the loan will have a ripple effect on the other borrower.
Who a co-borrower is best for
Co-borrowing is typically preferable if both borrowers will benefit from the loan. For example, if two people start a business together, they might take out a personal loan as co-borrowers and work on paying it back together. Both directly benefit from borrowing and enter the transaction knowing that they’ll each be making payments.
How to choose between a co-signer or co-borrower
The right approach depends on what your goals are for the loan. Consider these factors when choosing between a co-signer and a co-borrower.
Co-signers
A co-signer won’t have to put up collateral or accept responsibility for regular payments. Also, if the primary borrower makes on-time payments, the co-signer will never have to worry about the loan — and may still benefit from an improved credit score. .
On the flip side, if the primary borrower defaults, the co-signer will be on the hook for payments. Plus, they won’t be able to use the loan funds and might have difficulty getting approved for other loans since it still counts toward their total debt-to-income ratio (DTI).
Co-borrowers
A co-borrower benefits from the loan directly. Lenders may also offer lower rates and higher loan amounts, especially if both borrowers have good credit. And since each borrower has equal responsibility, you may not need to provide additional collateral to secure the loan.
What should I do before co-borrowing or cosigning?
Before co-borrowing or cosigning a loan application, have an open conversation with the other person. Determine if the loan is necessary, consider what alternatives there are and discuss each person’s financial picture and future goals.
Because both options have considerable financial risk, you should consider a contract that outlines how responsibility will be split and what happens in worst-case financial situations. It is also useful to research your state’s co-borrower and co-signer rights. There may be protections around property ownership and how credit is impacted.
Bottom line
Ask yourself a few questions before applying for a loan with someone else:
Can you afford to make payments toward the loan?
How stable is your source of income?
How will co-signing or co-borrowing affect your future goals?
What are the financial habits of the co-applicant or primary borrower?
Co-borrowing might make sense if you know the risks and want to borrow money with someone to accomplish a common goal. Alternatively, co-signing might be right for you if you want to help out a loved one by guaranteeing a loan.
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