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using a co-signer to get a loan

For many people, getting a loan for the first time can be difficult (like for that first car). When you go to a lender, the loan officer looks at your credit history to decide whether or not to give you a loan. If you don't have a credit history, the lender can't tell how you've handled credit in the past. They can't tell if you a good risk or not. Not having a credit history holds you back from doing some of the things you want to do.

How do you start a credit history if you can't get a loan?!

Use a "co-signer." Basically, when someone (such as one or both parents) co-signs a loan for you, the co-signer vouches for your character and responsibility. A co-signer puts his or her own good credit on the line by promising a lender that you will make the payments and follow the terms you've agreed to. A co-signer also promises the lender that he or she will make the loan payments for you if you can't. These promises guarantee the lender will be repaid for the loan (or at least drops the risk to minimal). A lender will be more likely to make a loan to a person who has a co-signer, especially if the co-signer's credit history is strong.

If you make your payments on time for several months in a row, usually the co-signers and you can approach the lender and ask that the co-signer(s) be released from the loan or note. If the lender says OK, then you alone are liable from that point on.

If you sign as a co-signer...

After you have set up a strong credit history, someone may ask you to co-sign a loan for her. Co-signing isn't something you take lightly. If you co-sign a loan for a friend and he misses payments (becomes delinquent), you, the co-signer, will be responsible for paying the rest of the loan. That obligation is reported to credit bureaus just as if the loan were yours.

Co-signing is a big responsibility, and you should only co-sign a loan for someone you really trust. If you aren't careful in making a decision to co-sign, someone else's actions could ruin your credit.

Signing for another person gets reported to the credit bureaus. Doing so does not hurt your credit rating or score, but it means the amount of that loan would not be available to you to borrow for yourself if you had a need. Signing reduces your borrowing potential.

Using a co-signer may be the only way to get that first car or something else, but it's a pretty good way to get started.