What are the possible implications if I co-sign for a loan?
The co-signer enters an agreement to be responsible for the repayment of the loan if the borrower defaults. A lender will usually not go after the co-signer until the borrower defaults, but they can lawfully go after the co-signer at any time.
It has been stated by finance companies that in the case of a default most co-signers actually pay off the loans that they have co-signed for including the legal and late fees that end up being tacked on. Clearly this can be a large financial burden, and it can also reflect negatively on the co-signer’s credit.
If you do agree to co-sign on a loan for someone, you can request that the financial institution agrees that it will refrain from collecting from you unless the primary borrower defaults. Also, make sure that your liability is limited to the unpaid principal and not any late or legal fees.
Upon co-signing you may have to brandish financial documents to the lender just as the primary borrower would have to.
Co-signing for a loan gives you the same legal responsibility for the repayment of the debt as the borrower. If there are late payments, this will affect your credit as well.
If you are asked to co-sign for someone, you may want to provide another option and suggest that they get a secured credit card. This way, they can build up their own credit history and not open themselves up to the possibility of taking on a debt too large, placing themselves, and you, in financial danger.
How can I ensure that I get the best possible rates on my loans?
Be careful when signing up for a home equity loan or line of credit – the disclosed APR does not reflect the total fees that are associated with the loan, such as closing costs and others. Do not forget to compare this cost, as well as the APR, across multiple lenders.
The vast majority of home equity plans will utilize variable interest rates instead of fixed. A variable rate reflects the current prices of a publicly available index, like the prime rate, or the U.S. Treasury Bill rate, and the rate of your loan will oscillate accordingly.
Generally a lender will offer a discounted introductory rate, often referred to as a “teaser rate”. Take caution – these rates can sometimes fluctuate unless it is stated that there is a fixed rate. Sometimes the lender will give you a great introductory rate that is variable and can change with time to a rate much higher than you originally agreed to.
Since the rate is linked to an index rate, find out which one it is and how much their margin is. Some companies will have a cap on how much your rate can vary within a particular period of time.
Is it better to get a home equity line of credit or a traditional second mortgage?
With a second mortgage you will have a fixed amount of money that is repayable over a fixed period of time or is due in full at a given time. A home equity line of credit, on the other hand, is much more open-ended. You have a line of credit that can be borrowed from as you wish, and generally has a variable rate as opposed to a fixed rate.
Pay attention to the fact then when the APR is calculated it takes into account the interest rate charged plus points, finance charges and other fees, whereas with a home equity line the APR is calculated with solely the periodic interest rate.
What will the loan cost?
Before you are charged any fees, the Truth in Lending Act requires that the lenders disclose to you all pertinent terms of the agreement: the APR, payment terms, other charges, and any information about variable interest.
Generally you will receive these disclosures at the same time that you receive an application form and any additional disclosures promptly after. If any of the terms change prior to the loan closing, the lender must return all fees that have been applied, should you choose to back out of the deal.
The finance charge is the total amount paid in exchange for the use of credit, which includes the interest rate, service charges and insurance premiums. The Annual Percentage Rate (APR) is the percentage paid on a yearly basis.