Cosigner and No Cosigner Student Loan
A co-signer is some one who promises the bank to repay the loan in the event of default in payment by the primary borrower. A co-signer is usually required by banks when offering loan to those with bad credit. Usually students would not have any existing auto loans, or credit cards or mortgage loans. They may have failed to repay a credit card payment and eventually possess poor credit score. It is a natural tendency among the youth to be irresponsible or fail to keep a tab on the payments on time.
Banks consider those with no credit history, or worse, defaults or late payments as high risk borrowers. It is highly likely that loans may be denied to students under high risk category. Sometimes even under the Federal student loans programs they may fail to obtain a loan. And when the loans are approved for borderline situations, the banks usually charge higher rate of interest to compensate the risk on default.
To substantiate poor credit score or no credit history, borrowers could obtain a co-signer. In the case of student loans the co-signer is usually one or both the parents. The loan officers then check the standard factors such as repayment history, outstanding debt to income ratio and credit score of the co-signer and based on the credibility would decide whether to offer the loan or not.
In addition to the approval of the loan, co-signer’s credit quality determines the interest rate of the loan that is approved to the student. Those with lower credit score is assigned a higher interest rate, while the co-signers with a good credit score eventually gets a better interest rate.
Over the standard repayment period of about 10 years, the difference in the interest amount would mount to a considerable amount. For instance, let us assume that a loan scheme with 4% interest rate results in paying $5.489 as interest over the entire tenure of the loan, while a 6% loan rises up to $10,647. Though a different in just 2% sounds like too much, you actually end up paying almost double the amount towards interest charges.
These days students may require up to $100,000 for an undergraduate program and may seek a student loan. Assuming the interest is 6.8% the amount would mount to $567 per month and per annum it may work to almost $6,600. If the interest rate for the same amount was 5%, the monthly payment would be $417 and annual payment works up to $4,820. These interest payments are calculated assuming that the repayment starts immediately. If deferred payment is opted for a period of six months, the same interest % would end up to a higher payment than the immediate repayment plans.
If a co-signer with better credit history is available, the interest payment can be considerably lowered and can provide the chances of opting for better loan features. Students may also go through loan calculator such as bankrate.com to check the sample scenarios.
Student Loan Facts and Information
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