Statistics from CNBC show that the average American has about $38,000 in personal loan debt. While some people are making progress in paying down this debt, it can still make it tough to get more credit. From a lender’s point of view, adding more debt could lead to defaults.
Fortunately, there are ways to still achieve your financial goals. Most lenders are open to having a cosigner or using collateral, as these options show that you’re serious about repaying the loan. However, each option comes with its own risks. Let’s break them down:
USING COLLATERAL: A QUICK LOOK
Collateral refers to valuable property, like a car or house, that you pledge to back up a loan. If you can’t make the payments, the lender can sell your property to get their money back. For example, in California, you can use your car as collateral for a loan.
PROS AND CONS OF COLLATERAL
Putting up collateral can improve your chances of getting a loan that might otherwise be denied. It can also lower the interest rate and even allow you to borrow a larger amount. But it’s crucial not to overestimate the value of your collateral because it loses value over time.
Additionally, if you find yourself unable to repay the loan, you risk losing your possession. Always make sure to realistically evaluate your ability to repay before taking out a loan. Also, avoid borrowing more than you need if your asset is worth more than the loan amount. This option might not be available if you don’t have valuable assets to offer.
TRYING A COSIGNER
This option involves someone you trust, like a family member or friend, who helps you get a loan. They won’t have to pay back the loan unless you default, but missed payments will affect their credit score. The best cosigner is someone with a strong and long-standing credit history.
PROS AND CONS OF COSIGNING
A cosigner with a good credit score can help you get a bigger loan than you could on your own, often at lower interest rates. Plus, making timely payments on this loan can improve your credit score, making it easier to get loans in the future without a cosigner.
However, failing to make payments can strain or ruin your relationship with the cosigner. The lender might also take legal action against both of you if the loan isn’t repaid. Since the loan amount considers both your assets and the cosigner’s, there’s a risk of borrowing more than you can afford to repay.
IN SUMMARY
Both of these strategies come with risks and depend on how much risk you’re willing to take. Carefully evaluate your financial situation before deciding, to avoid serious consequences.