Cosigning or Collateral: Which Path Offers Greater Benefits?

According to CNBC, the average American carries about $38,000 in personal loan debt. While some people are working towards paying this off, having such a large debt can make it tough to get more credit. From a lender’s point of view, taking on additional debt might lead to defaults.

However, there are still options to pursue your goals, as many lenders approve loans with the help of cosigners or collateral. These options show the lender that you are committed to fulfilling your obligations. Let’s take a closer look at these strategies:

USING COLLATERAL:
Collateral involves putting up a significant asset as a guarantee that you will repay the loan. If you fail to repay, the lender can sell your property to recover the remaining balance. For example, in California, car title loans use your car as collateral.

BENEFITS AND DRAWBACKS OF COLLATERAL:
Offering collateral can greatly increase your chances of getting a previously rejected loan approved and often at a lower interest rate. You might also be able to negotiate a larger loan amount since the lender’s risk is lower. However, it’s important not to overvalue your asset and to remember that depreciation can lower its worth. Also, overestimating your ability to repay could lead to losing the asset. Only borrow what you can realistically afford and use this strategy only if you have a valuable asset.

USING A COSIGNER:
In this approach, a family member or friend signs the loan application with you. They do not have to repay the loan unless you default, but their credit score will be affected if payments are missed. A good cosigner is someone reliable, with a strong credit history, which improves your loan approval chances.

BENEFITS AND DRAWBACKS OF COSIGNING:
A cosigner with a better credit score can help you secure a larger loan than you could on your own. You’ll likely get lower interest rates, and timely repayments can improve your credit score, potentially making future loans possible without a cosigner. However, defaulting can damage or end your relationship with the cosigner, and both of you might face legal action if the loan isn’t repaid. Be wary of taking loans that exceed what you can reasonably pay back.

CONCLUSION:
Both collateral and cosigning come with their own risks, primarily depending on your ability to manage risk. It’s essential to carefully assess your financial situation before choosing either option to avoid serious consequences.