Cosigner/No Cosigner Loans

Everyone knows what a co signer is. He is a second party who stands behind the loan and promises to repay it if the first party neglects to do so.He usually gets involved when the primary borrower has little or no or bad credit.

Students rarely have any credit cards,have no car loans and certainly have no motgage loan.So they usually have no credit history to speak of and of course none that could stand good for a loan.And as we all have done in our younger days, the student probably made some bad choices and may have been irresponsible about making payments on any credit cards they might have gotten.

That lack of credit history, or actual late payments and defaults can quite easily put the would be borrower into a bad risk category.Loan officers, even in Government student loan programs will cast a cautious eye on such a student. His or her application may well be denied or may be charged a higher interest rate to offset the risk.

To counteract this bad behaviour the borrower can and should enlist the aid of a cosigner.In the normal case that person can be one or both parents.Loan officers will then look at the parent's FICO score, debt to income ratio,repayment history and other factors when deciding to grant or deny the loan.

At that time the parents credit history becomes paramount on deciding what interest rate will be charged.It goes without saying that those with a high credit score on the FICO will get the best rate of interest while those with a low score will get the higher rate.And this can make a substancial difference over the course of a ten year repayment plan.

For example, one popular co-signer program shows a 4% program paying $5,489 in interest over the life of the loan, rising to $10,647 at 6%. A 2% difference doesn't sound like a lot, but given contemporary borrowing amounts and compounding, such a scenario is not unrealistic.

For example, it isn't uncommon these days for students and parents to borrow as much as $100,000 to finance an undergraduate education. Even if interest is paid right away (so it doesn't accumulate while the student is in school, adding to the total to be repaid), interest at 6.8% is almost $567 per month. The annual interest total is almost $6,600.That is a lot of money.

Lowering that interest rate to 5% (the official amount for a need-based Perkins loans) reduces those numbers to $417 and $4,820. That example assumes that repayment begins immediately. Deferring repayment until six months after leaving school, the most common scenario, will result in much higher amounts unless the interest is deferred or subsidized. So of course using a co-signer with good credit can substantially lower the total interest paid, along with improving the chances of getting desirable loan features. Run through some sample scenarios by using a loan calculator such as the one from Bankrate.com.