Statistics from CNBC indicate that the typical American holds around $38,000 in personal loan debt. While some may be on their way to clearing this, such a debt load often makes it challenging to acquire additional credit. From a lender’s perspective, shouldering additional debt could lead to defaults.
Luckily, this isn’t a dead-end to your aspirations as most lenders usually approve of cosigners or collateral, this signals them that you intend to hold up your end of the deal. Both strategies, though, come with their own sets of risks. Let’s break them down:
UTILIZING COLLATERAL: AN OVERVIEW
Collateral pertains to an actual and significant property you pledge as a surety that you won’t default on a loan. If a default occurs, the lender would resort to selling your property to recover the remaining balance. An example is car title loans in California, where your car serves as the collateral.
THE PROS AND CONS OF COLLATERAL
Submitting collateral can significantly improve your odds of having a loan application, initially rejected due to lack of security, approved faster. This method can also reduce the interest rate you’ll pay back to the lender. In certain circumstances, it might be possible to negotiate a larger loan sum as the lender’s default risk reduces.
Keep in mind, though, a common mistake is overestimating the item’s value and ignoring depreciation which may lead to an unpleasant surprise later on. Additionally, if you overestimate your ability to repay the loan, you run the risk of losing your possession. Therefore, it’s crucial to realistically assess your ability to pay back the loan before obtaining it.
Never be enticed into borrowing more than necessary if your asset exceeds the loan’s value. Finally, this strategy might not be applicable if you don’t have valuable possessions.
RESORTING TO A COSIGNER
Under this method, a family member or friend assists when applying for a loan. They won’t have to repay the loan unless you default, yet failing to make timely payments impacts their credit score. The ideal cosigner is a trustworthy person, with a robust and long-standing credit history which raises your chances of loan approval.
PROS AND CONS OF COSIGNING
A cosigner with a more impressive credit score can potentially secure a higher loan than you could do solo. You’ll also likely enjoy lower interest rates, and prompt loan repayments would boost your credit score. Consequently, future loans may be possible without a cosigner.
Nevertheless, defaulting can strain or even sever your relationship with the cosigner. Moreover, the lender might sue both of you if the loan isn’t repaid. Since the loan amount is based on both your and the cosigner’s assets, the prospects of qualifying for an unsustainable loan is real. Hence, avoid loans that outstrip your repayment capacity.
IN CONCLUSION
Both these strategies bear inherent risks. They essentially boil down to risk tolerance. Scrutinize your financial condition before picking an option to avoid grave repercussions.
