Personal loans are a convenient way to bridge financial gaps both in the short term and the long term. Many licensed money lenders approve personal loans in Singapore to applicants with low credit scores if they have a co-signer with a higher rating.
If you have been asked to co-sign a loan, consider these points before committing yourself.
The potential risks
Taking on a loan can have far-reaching consequences. Co-signing for a personal loan comes with a unique set of potential risks:
- Credit risk – Regardless of whether you yourself apply a personal loan in Singapore, debt can damage your credit score if there are problems with repayment. A co-signer is just as liable for the repercussions, both financial and legal, if the loan principal defaults on the loan. Any such adverse financial incidents will stay on your credit history for years.
- Debt burden – Co-signers for personal loans take on the burden of the outstanding loan principal onto their own credit balance. That amount and the value of monthly repayments are critical factors that lenders consider when assessing any subsequent applications the co-signer makes. This applies to mortgage, business loans, car loans, and even credit cards.
- Interest rate – Your debt burden does not just affect how much you are able to borrow, but also how much you will have to repay in interest. When a co-signed personal loan pushes you towards the debt limit for your credit score, lenders will raise the interest rates that apply to your subsequent loans.
- Personal impact – Money problems tend to fracture relationships. If the loan principal begins to default on payments, you will find yourself on the receiving end of unpleasant reminders while facing the prospect of increased debt and a damaged credit score. Your relationship with the borrower will inevitably suffer.
Remember, it is not simple and can often be impossible to remove your name from a co-signed loan. Creditors view such a move as a threat to their ability to recoup the debt, and include near-impenetrable clauses in the loan contract to prevent it from happening.
The potential rewards
While there are inherent disadvantages to co-signing, there are certain advantages, too.
- Your credit score – One of the factors used to assess credit scores is a diverse range of debt types and the frequency of your applications. The perils of a co-signed loan notwithstanding, an approved application itself may assist you slightly in maintaining a high credit score.
- Personal relationship – Co-signing a loan is an incredible act of trust on your part because there are few benefits for you even as you shoulder much of the liability. Your willingness to co-sign personal loans despite this demonstrates selfless commitment and may very well cement your relationship with the loan applicant.
Apart from these advantages, helping someone with a personal loan can help them establish themselves financially, too. Successfully paying off the loan, especially if that objective is achieved without any hiccups, significantly boosts their credit score. This will allow them to apply for loans on their own in the future and will likely make them eligible for lower interest rates as well. All thanks to you.
In short, there are many potential pitfalls and comparatively fewer advantages to co-signing personal loans. If you do decide to proceed as a co-signer for a personal loan in Singapore, take these precautions:
- Read the terms carefully – This is critical for any financial document but even more so as a co-signer. Scour the fine print for all clauses that relate to your liability. If possible, ask your lawyer or accountant to review the document before you sign.
- Monitor repayment progress – The specifics may vary by company and contract but lenders may not update you of late or missed payments until there is a problem. Tell the lender that you would like to receive regular progress updates so you can take preventative action early if required.
- Maintain personal contact – Your good relationship with the loan applicant can be a powerful incentive for them to abide by their payment obligations. Avoid bringing the matter up unnecessarily but do so immediately if there is a problem with late or missed payments.
Personal loans are a handy financial option but co-signing is potentially risky. When you apply a personal loan in Singapore, lenders such as Synergy Credit will always inform you of your obligations in advance. If you are currently considering co-signing for a personal loan in Singapore, speak to our friendly consultants so you can make the right decision.