Helping your Kids buy a Home

It is nice to help our kids buy a house. But it is equally important that we keep it “business.” If you loan them part of the downpayment or provide a loan to cover a gap in the financing, i.e. the kids come in with 20% down, take a 70% first mortgage and need 10% lent to them by the parents because the payments on an 80% first would be too much for their budget. The “Parental Second” can be creative. You can have the interest paid monthly or accrued to be paid annually. If you don’t have a payment plan and are letting the interest accrue, you can also compound the interest monthly or annually to increase your yield on the loan. Just remember that any interest earned, whether deferred or paid regularly, is regular income and subject to IRS taxation.

There is some bookkeeping to be done by Mom and Dad. The parents are required to provide their kids with a 1098 to document their interest paid so the kids may deduct the interest from their taxes.

For some parents, earning 3% or a bit more on your money is a pretty good deal considering how poor savings rates are today. Of course, your loan is in second position and, historically, loans in secondary positions usually have a greater interest rate than the first mortgage due to the greater risk accepted by the lender in second position. If a borrower defaults on the first mortgage, the holder of the second mortgage must make up the financial shortfalls on the first mortgage to make good his claim on the property. So asking for >4% is not unusual for a second mortgage. Many financial institutions are asking for prime plus one point on business loans. Wall Street Journal prime is 3.25% so, prime plus one is 4.25%. That might be a very satisfactory rate for a family loan. Let’s keep in mind, historic rates for home mortgages are up in the 5’s. Thus, 4.5% is still a pretty good deal.

Hmmmm, could a loan like this become part of your retirement income? If you are retired, this sort of thing can be helpful to your income. $40,000 at 4.5% generates about $150 a month in interest income. That's a nice supplement to someone's Social Security.

Of course, I suppose that each of us knows our kids and whether or not they would be a responsible adult and repay their loans; particularly loans from their parents! Let’s keep in mind that we need to go all the way and file a deed of trust and have your kids sign a promissory note that details how the loan is to be repaid. If you don’t do that, you deserve all that you are not repaid! The deed of trust protects your loan interest and your interest in the property. Without it, should you kids fail to pay, your ability to get repaid thru the trustee sale or foreclosure sale of the home will be compromised.

Emotional? Yes, there are a variety of ways for this to become an emotional mess. Is the parent depending on the interest from this loan to help with their retirement income? A missed payment in this case could be very critical. Suppose the son or daughter is involved in a large lay off? Even worse, their job is in low demand and finding a new job will take a lot of time. During this lay off, they stop paying their first mortgage. It is then the responsibility of the second mortgagor to make good the first mortgage to keep the first lender from filing foreclosure. Can all parents afford to pay this for their kids? That is a lot of stress and demonstrates for us the emotional issues that can come with lending to our kids. 

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Our next financial education workshops will be presented at our main office on Chesbro Ave in San Jose. This month we are offering "Establishing Credit" on May 15th which is a good course for high school and college students, but really works well for anyone interested in how credit gets established. 

On the 22nd we will be offering "Preventing Identity Theft" at our main office. This workshop provides you with all you need to know to prevent identity thieves and protect your good name from those who would use it for criminal acts. Get ready for summer vacation with our preventing identity theft class. 

May 15th - Establishing Credit - 6:30pm 
Meriwest Credit Union Main Office at 5615 Chesbro Ave, San Jose CA 95123
RSVP with Greg Meyer at gmeyer@meriwest.com or call at 408-365-6328

May 22nd - Preventing Identity Theft -6:30pm

Meriwest Credit Union Main Office at 5615 Chesbro Ave, San Jose CA 95123
RSVP with Greg Meyer at gmeyer@meriwest.com or call at 408-365-6328
 

A History of FICO Scores Part II

In the 1950’s, someone asked the question, how can we judge someone’s credit without having to read the entire credit report?

You see, not only was time an issue, reading the reports and making judgments based on the information in them became an issue. You could have two loan underwriters look at the exact same loan package and come up with wildly different opinions on a person’s credit. Some would give their approval of the loan and others denied the credit. There was no set of rules that told underwriters how to decipher and utilize the information they were gleaning from credit reports. It was all just “someone’s opinion,” very subjective.

Thousands of new borrowers were being approved daily and lenders needed a way to mitigate or gauge risk and develop a national standard for credit worthiness. In 1956, a company named Fair Isaac Company came out with a revolutionary idea; Credit Scores, also knows as FICO Scores.

How does the scoring work? FICO takes several important financial factors into account. The two most critical factors are the borrower’s payments and the balances they maintain. These items make up 65% of the score; 35% for the payment history and 30% for the balance ratio. That’s why a late payment has such a serious effect on our score. Collections are worse for us and our scores. The effect of a late payment on a loan or credit card will start to diminish after 24 months. If one has an open collection, the collection will have the same weight on their score on the last day of seven years as it did on the first day it was placed on the person’s report. The lesson here is very simple, make your payments on time and you will never have to deal with late payment issues or collections.

Balances play a role in our score if we don’t pay them down. 30% of your score is determined by the balances a person is carrying vs. how much they have available. Maintaining outstanding credit card balances by paying only the minimum payment can be very detrimental to your score. We have to make an effort to pay our outstanding balances off. For scoring purposes, the balances are added together and a ratio is calculated vs. the total amount of credit available.

The three remaining factors are our History. How long have we managed credit? That accounts for 15% of our score.

Finally, 10% each is allocated to the types of credit we manage and the number of inquiries made on our report annually.

With this data put into a computer algorithm, a number could be determined. That number would be an indicator of risk. A high number would indicate less risk is involved in lending to a person where, conversely, a low number would indicate a lower likelihood of repayment. This also led us to “FICO Score Lenders;” lenders that only grant credit based upon a predetermined level of score.

What is a “FICO Score Lender?” Typically, our major banks are using the FICO score as the primary determining factor in making their initial credit decisions. Let’s say a financial institution has 300 offices in California. On any given day, each office might send a loan application to their loan underwriting department. The underwriters, the staff who decide credit decisions, might number a dozen but receive 300 applications in one day. Prior to 1956, they would have to view each credit report to make a decision. Now, they enter the social security number of the applicant and the credit bureau gives them a number. If today’s number is 740, then any applicant with a FICO Score of 740 or above will get a further review of their loan package. The borrowers with a FICO Score of 739 or less are declined for credit as they did not make the score. Not only does the FICO Score help us determine risk, it helps lenders render faster credit decisions. Often, we can approve someone based on their credit within 24 hours.

Some may ask if using a score like this is fair. The FICO Score is basically colorblind. Credit is ultimately granted to those who have proven they can manage it well. It is typically declined for those who manage it poorly. Over the years, the score has been adjusted down for times when credit was loosened and adjusted upwards for times when we had to tighten up on the use of credit. Today, most financial institutions are looking for borrowers with a FICO Score of 740.

Are credit unions just like banks on FICO Scores? Not necessarily, credit unions generally take a more holistic approach to lending; meaning they tend to take a look at the “whole borrower,” not just their credit score. Before a credit union renders a credit decision on someone, we will take into account how long this person has been on the job? How long have they have lived in the area? How long have they been a CU member? Of course, a CU will consider their income and debt to income ratios before we provide our final decision. What this means is, if a borrower comes in with a FICO Score at 739, or 735, we don’t automatically decline their loan request. We take a wider look at our borrower to determine their creditworthiness.

Can banks help their clients with loans just like credit unions do? Sure they can, but they don’t! They will tell you they don’t have the time. It takes to much time to make decisions on marginal credit applications. Time is money and we need that money to show a profit to our shareholders.

I used to work for a bank that called itself the “Largest Financial Services Provider in the World.” One of my bosses once said to me, “We need to make profit. If we don’t make a profit, we might as well be a credit union.” As if there is something wrong with that?

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Thank you. I hope you enjoyed our history of FICO scores. If you want to learn more about credit, please attend our next Credit Myths Workshop this Wednesday the 24^th at our Monta Loma Financial Center in Mountain View: 580 North Rengstorff Ave, Mountain View CA.

To RSVP for this workshop, click this link.

Credit Myths and Credit Repair

Credit Myths and Repair    April 24th at 6pm   Monta Loma Financial Center

Learn how collections, credit inquiries, and late payments effect your credit score. What is a FICO score? You will learn how to access your credit report and your credit score for free. Learn from the experts.

Setting Financial Goals...And Reaching Them!

Are your financial goals set in concrete or can they be blown away as easily as a dandelion? 

Achieving your dreams and creating the financial future you want always begins with one important first step: a goal. Whether you're looking to help your child set goals so she achieves academically or have your own financial or self-improvement goals for the New Year, there IS a science to setting and meeting them.

A 2010 study in Applied Psychology followed college students who went through a multi-step goal setting program. Those who followed it completely showed significant improvement in their grades compared to those who did not.

While New Year's resolutions are notoriously short-lived, a clear process will put any objective you've set for yourself within reach. No matter what you have in mind, you can apply these steps to whatever goals are important to you, and the whole process should take less than 90 minutes.

1. Take a few minutes to write about the financial future you'd like to achieve. It's okay to start with a vague idea, but include as many specific details as possible.

2. Looking at the financial future you've envisioned for yourself, pick six specific and attainable financial goals that could help you achieve that future.

3. Number your goals according to their order of importance.

4. Look at each goal and write a paragraph about how achieving that specific step will benefit you.

5. For each financial goal, break it into smaller more manageable steps.

6. Identify obstacles that may get in the way and come up for a strategy for overcoming them should you need to do so.

7. Write about your commitment to reaching these ultimate financial goals.

That's it. Sound easy? Perhaps. But by taking the step of committing your goals to paper and working through these steps, you've laid the groundwork for success.

A goal is simply a dream with a deadline....may all your dreams come true!

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Reality Based Budgets for Teens and College Students – Jan. 16^th

Our next Financial Education Workshop will be Reality Based Budgets for Teens and College Students. It is a post college simulation of renting an apartment, buying a car, and developing a spending and savings plan. It is a fun and interactive session for the whole family and really opens the door to discussions about managing money. If this is something you or a member of your family needs, please feel free to join us. These workshops are open to the public.

Reality Based Budgets

6:30pm January 16^th at our Chesbro Main Office Location

5615 Chesbro Ave, San Jose CA 95123

Please RSVP with Gmeyer@meriwest.com.

Moving and Credit

There are some things that can happen to our credit when we move and it can be very troubling. Lost or misplaced statements may mean missed bills. On utilities it is not so bad as we typically have a couple of months to pay our cable or water bill. However, our credit runs on a 30 day cycle and missing a payment on a Visa card can hurt our FICO score pretty dramatically. There are some tips below for getting your mail forwarded properly.

  

When we move, we buy a new home and may go to multiple lenders to access a loan at good terms or we may have multiple inquiries for rental housing. Typically, those multiple inquiries from home lenders will be treated as one inquiry for our scoring. They will appear as multiple inquiries on our credit report and will remain there for two years but only have an effect on our score for one year. Inquiries comprise only about 10% of our total FICO score.

Another thing we do when we move is close accounts. A bank may be a regional bank, but its Visa or Mastercard is accepted worldwide. There is seldom a need to close a VISA or M/C unless the terms are unfavorable. Closing these cards reduces one’s credit score and your borrowing capacity; sometimes eliminating years of experience from a record. Be selective and careful when considering closing a credit card. Consider closing a card if a card has a small line of credit or is related to a regional or specialty store that is not available in your new town.

Clean up your old records before you move. This is a good time to shred old records and prevent ID thieves from getting their hands on them.

Here are some mail forwarding tips:

Before you move:

1. File your forwarding address with the post office at least two weeks before you move. Not only does this get your bills and statements sent on to your new home it prevents identity theft. Old statements in a mailbox are like candy to an ID thief. The post office will mail a letter to your old address to verify this change.
2.  While you are at the post office, get a change of address kit from them. Sit down at home that night and send a change of address to every company that sends you a statement or a bill. Some statements only come quarterly so be sure to check. Make sure you have the effective date of your move correctly entered. With some bills, creditors and financial institutions, you may be able to change your address online or over the phone. Note on your list who you called and to whom you sent a notice.
3. During your move: Ask a neighbor, landlord, or friend to check your mailbox to ensure the forwarding and address changes went thru and pick up any mail that does not get forwarded.
4. After your move: Contact the new tenants or homeowners and provide them with you contact data in case any of your mail fails to get forwarded in the future. 

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Our next financial workshops are:
Oct. 17th  - 6:30pm
Real World Budgets for Teens and College Students
Sunnyvale Financial Center at Fair Oaks and El Camino Real in Sunnyvale. 
RSVP with Gmeyer@meriwest.com


Oct. 24th  - 6:30pm
Credit Myths and Repair
Sunnyvale Financial Center at Fair Oaks and El Camino Real in Sunnyvale. 
RSVP with Gmeyer@meriwest.com

The Costs of Bad Credit Part 2

The cost of bad credit can be very high; provided a credit issuer will give you credit. Last week, we looked at the costs of incurring bad credit such as late fees and higher rates. This week we will take a look at who may lend to a risky borrower and the extended cost of bad credit.

A credit score indicates to the lender the likelihood of a loan being repaid. The higher the FICO score, the more likely a loan will be repaid. Often times, those with low scores are offered a higher (AKA sub-prime) rate for car, home, and other credit purchases. It would not be unusual for someone with a low rating to be offered a 10-14% or higher interest rate on a used car loan when the prevailing rates for someone with a good credit rating would be about 7% or less. That was prior to the recent recession. Lenders are much more conscious of the defaults in subprime loans that have occurred over the past 5 years. Many have stepped away from the subprime market completely. Thus, for many lenders, either you qualify for a loan or you don’t. The subprime loan is no longer an option for many traditional lenders or many borrowers.

There are still some institutions that will lend to people with slightly less than perfect credit; they are known as credit unions. Why? Because credit unions take a more holistic approach to lending to their members. The FICO Score is important, but is not the only factor considered when lending. A credit union may require a higher down payment of subprime borrowers and/or ask them to pay a slightly higher interest rate. They will look at the applicant’s employment; how long have they worked for the same company? How long have they lived in the same home or neighborhood? How has the member managed their credit over the past 24 months? The answers to these questions may increase or decrease the interest rate or down payment.

As an example, let’s say a FICO score of equal to or greater than 740 is the target score for the institution and someone in that score range will get a rate of 2.99% for a new car loan with zero down. In this case, if someone misses the target by a bit, say the member comes in at 680, the credit union would likely make the loan with a somewhat higher rate than the base rate to help the member. Instead of 2.99%, perhaps the loan would be for 5.50%.

In this case, a car loan of $15,000 applied for a borrower with a 740 score and a borrower with a 680 score, there is a 2.51% difference in the loan rate (2.99% APR vs. 5.50% APR). The borrower with the 740 score will pay only $934 in interest over a 4 year period where the borrower with the lower score might pay as much as $1,745; a difference of $811 over the four year loan term. The borrower may not only be required to pay a higher interest rate, they may have to come up with money for an additional down payment. Subprime borrowers are often called upon to have a higher equity in their security than those with preferred rates. That is an additional cost to the subprime borrower. That is money that has to come out of savings leaving the borrower with reduced liquidity. Another cost is the loss of earned interest on the money used for the down payment. Let’s say the borrower has to put up an additional $3,000 in order to qualify for the loan, $3,000 in a savings account at 1% APY for 4 years would have earned $125. That’s better than spending an additional $800 in interest expenses.

Avoid these increased costs by managing your credit correctly.

• Pay your bills on time and pay more than the minimum when possible.
• Pay down outstanding balances.
• Avoid using your entire credit available limit
• Only apply for credit when you want it. Don’t apply for a card just to get a discount!
• Read your credit contracts. Don’t get caught in a consumer trap. 

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Are you planning on buying a home? This is one of the great times to purchase one. Loan rates are low and home prices are starting to rise!  If you are ready to buy, visit our next Homebuyer's Seminar here at the Meriwest Credit Union main office on Sept. 8th. Get all the details you need to finance your home purchase! 

Curious about rates? Here are some links to our current interest rates on consumer and home loans:

Auto Loans - New and Used

Home Loans

Equity Lines of Credit

Qualifying for a Home Loan - Jumping through the Hoops

As a recovering banker and branch manager who has processed hundreds of home and consumer loans over 30 years, I would like to provide my readers some insights into loan qualifying for a standard conforming home loan of $417,000 or less. If you have not checked lately, the approval bar for loan qualifying has been raised over the past few years. The first adjustment to the bar was on credit qualifying. The credit score required for a typical home loan five years ago was 680. That was the score everyone was shooting for. Today, that can be 720, 740, or even higher depending on the underwriting standards to which the borrower is being held. Each financial institution sets its own criteria based upon their risk tolerance.

The next criteria we will look at is the borrower’s income. Do they have enough to make their loan payments and other obligations? Lenders use a debt to income ratio to determine someone’s ability to make their monthly payments. The ratio usually varies between 30% and 40% of monthly income; meaning that the borrower’s loan payments and other credit obligations should be no more than 30%-40% of their total gross monthly income. If someone is at or below this ratio, they are in good shape for an approval. If they are over, they may need to consider a smaller house, paying off other debt, or adding a second job to improve their debt to income ratio.

We have looked into credit and income. There is a third rail in this mortgage process and that is the value of the home. Today, for the best interest rates, lenders are looking for borrowers to put down 20% of the appraised value or sales price of the home. What this gives the borrower is equity. In this case, equity is the amount of the value of the home that is not encumbered by a loan. So, if we are buying a $200,000 home, we would need to put down $40,000 as a down payment. This would mean you would be financing $160,000 and your payments would be based on that amount. Making a down payment can help with your debt to income ratio as well.

Why do lenders require so much equity? There are many reasons. There may be a downturn in the market and the lenders want to protect their loan and prevent the home from being “under-water” should a real estate market downturn take place again. If the lender needs to foreclose on the property, there is a cushion of equity to cover costs of the foreclosure process. But the main reason lenders require equity is that now the borrower has some skin in the game! In the case of the $200,000 home, the borrower has $40K invested in the home. Anyone with that sort of personal investment is not likely to walk away from the home should they have some hard financial times.

Qualifying for a conforming mortgage loan is no different today than it was ten years ago before the residential real estate bubble started. A borrower has to meet credit standards, income requirements, and the home must qualify under the loan to value ratio which is generally 80%, requiring a 20% downpayment for a standard conforming home loan of $417,000 or less.

Final Word to the Wise: This Spring, I refinanced my home with a new lender. It took less than thirty days to process my loan. Why? I provided all the documentation that was asked for up front with the application. If a borrower provides all the statements, taxes, paystubs, and other documents that the lender asks for to process the loan, their loan approval answer can be had very quickly. The thing that holds most loan approvals up is a lack of documentation. I have waited weeks for some clients to provide the required documents. If a person waits too long they may miss their window of opportunity for the interest rate. A rate “lock in” is where your interest rate is reserved for a fee paid to the lender. If a borrower is not forthcoming with the required documents in a timely fashion, the borrower may lose their preferred rate and the fee they paid for the interest rate lock in. Best advice, do your homework, research the rates, and have your documents prepared before you start getting serious.

Also, consider getting “pre-qualified” or “Pre-Approved” by your lender. Pre-Qualification will help you determine how much home you can afford, and what type of home you should be looking at. Pre-Approval will do the same, but will include a review of your personal credit. Lender’s often charge a small fee for Pre-Approvals.

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If you are interested in purchasing a home and wish to get Pre-Qualified or Pre-Approved, please see Meriwest Mortgage’s website  or contact them at 1-800-364-6636. Today’s rates are available here.

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For all of you out there looking for our next financial education workshops, your summer wait is over. Our next workshop will be "Reality Based Budgets for Teens" at our Milpitas Financial Center at 6PM on Aug. 22nd. 

Our next "Credit Myths and Repair Workshop" will take place at our Milpitas Financial Center on Aug. 29th at 6PM. 

I hope I will meet you at one of our seminars! Have a great week!

Adustable vs. Fixed Rate Home Loans

Are you thinking of diving into the market and buying a new home? Home Loan Rates are at a historic low point. Fixed 30 year rates have just gone below 4.00% and could go lower if the real estate market stays slow for now. Interest rates are not effected by gravity so when they go down, they will not stay down. They will go up when the economy heats up. That could be by the end of 2012 or it could be a year or two away. The economic situation is very fluid right now.

This brings me to my point; rates don’t have very far to fall but they have a lot of headroom to rise. On a loan taken out today, an adjustable rate can go down a little bit over the near term, but those who have a new adjustable rate mortgage need to be conscious of the movements of the market and be prepared to refinance to a fixed rate loan quickly. The best bet is to grab a fixed rate mortgage now. At 4% a borrower is borrowing at one of the most significantly low rates in recent U.S. history!

The Fed says that rates will remain low for a while. If there is a fix to the EU Debt Crises and our economy heats up, rates can go up fast. We have seen it repeatedly since 1978. Each time a recession has ended, lending rates went up quickly. Those with adjustable loans were hit the hardest as their loans are tied to the Fed rate, LIBOR, or the prime rate. Those rates can be very volatile in a heated economy. The Fed controls the money supply with interest rates. If the Fed governors feel there is too much easy money or because of the easy money they are seeing inflation, they can put the brakes on the economy and slow it down with a rate increase.

One last thing to keep in mind is a lender’s spread; the amount of interest he makes on money he lends vs. what he is paying for savings accounts. Typically, the spread should be about 2% or greater between the average interest rate being paid on savings vs. the average overall loan rate. Right now, financial institutions are paying less than 1% on savings accounts. There is room for rates to go down a little bit so that may make an adjustable loan more attractive. Many adjustable loans can go up 2% in one year. Thus, one can go from 3% to 5% on a mortgage loan in about a year. That would cause the payment to increase pretty dramatically. I think this is a good argument for a fixed rate loan. 

Our next financial education workshop is:
 Free Financial Education Class: Auto Financing 101
Wednesday, June 20, 2012 - 6:30-7:30 p.m.
Chesbro Financial Center, San Jose, CA

How do I Increase my FICO Score?

We all want a higher credit or FICO score. It helps to get additional credit, usually at better rates. How do we raise our personal FICO score? That’s a question I get every week in my workshops. Here are some of the best strategies for raising your FICO score:

• The two simplest strategies are making your payments on time and paying down any outstanding balances. Each time you make a payment on time your score goes up. Don’t let any credit debt get near 30 days late. Also, whenever a balance is paid down, especially on credit cards, your ratio of used vs. available credit goes down, thus, raising your FICO score. Keeping your cards’ outstanding balances at less than 30% of the available balances on each will maximize your FICO Score.

• Another tip is not to close old credit cards. If it does not have a balance, consider using the card for a small transaction once or twice a year and pay it off immediately. This will help your credit payment history and the lack of an outstanding balance on the card will improve your capacity to borrow. This relates directly to your ratio of used vs. available credit. The higher the amount of available credit, the higher your score.

• Two things happen when we close old cards, the history they built for us over the years goes away after a short time and the available balance is removed from our overall available credit, limiting our current borrowing capacity and reducing our FICO score. Close old credit cards at your own risk.

• Avoid too many new credit inquiries. If you are trying to increase your FICO score, avoid applying for new credit cards or loans too often, especially those at a department store. Each application you sign means a hit on your score. Multiple applications mean multiple hits. Many businesses will offer you a discount for applying for their particular card. Your credit score will benefit if you just say No!

• Another strategy is to move your revolving debt to installment debt; essentially going from a variable account to a fixed rate/fixed payment account. You would be changing your variable revolving credit account to a fixed payment personal loan. The highest scores include both revolving and installment debt. This is what takes place when someone does a bill consolidation, changing variable interest debt to fixed rate fixed payment debt.

• One of the easiest and most direct ways to raise your score and your credit history is to get a secured loan from a credit union that will report your loan payments to the credit bureau. These are often referred to as share loans. As you are borrowing your own money, a high FICO score is not required. Not all CU’s report to the credit bureau on these types of loans, so you have to shop for them. Essentially, one opens a savings account and takes out a loan on their money in the account. As they pay back their own money, they will build their credit score. This can also be done with a secured credit card account with your CU. Mismanage either of these programs and you will lose your deposit and possibly do damage to your credit score.

• Banks offer savings account loans but, generally, they will not report your payment history to the credit bureau as credit unions do.

Finally, the key, the thing that will make the biggest difference for you in building your credit score -  is Time! Utilize these strategies and be patient. Rome was not built in a day, neither is your credit score. Your personal history of proper credit usage is important so take the time to do things right and make your payments on time, pay down balances, and utilize your old cards as you should to maintain them. Proper maintenance of your credit over time will result in a nice fat credit file and a high score.

Tips to understanding your FICO score

http://www.myfico.com/downloads/files/myfico_uyfs_booklet.pdf

Auto Sale at Meriwest Credit Union – Main Office

May 19th - 9AM to 5PM
May 20th - 10AM to 6PM
5615 Chesbro Ave, San Jose CA 95123

Get special dealer pricing and financing deals.

To get pre-approved for financing, call Meriwest Credit Union at 877-MERIWEST or online at Meriwest Credit Union Auto Loans.

Loan Cosigning: How does it affect me?

The Myth: If I cosign on someone’s loan, it won’t affect my credit.

The Facts: Cosigning on a loan can affect your credit. The way the cosigned person manages the loan will determine whether the affect of that loan will be positive or negative to your credit. Please keep in mind that when you cosign a loan you are now partnering with the other person on the loan. In the case of a car loan, if the cosigned person has a late payment, you have a late payment. If the cosigned person has a repossessed car, you have a repossessed car, too.

Are you Co-Signing for someone? 

It takes a brave person to cosign a loan as you are taking on a lot of responsibility. You are promising to be responsible for the payments of the loan should the person you are cosigning for not be able to pay. You are also doing the cosigned borrower a huge favor by letting them use your credit to upgrade their credit score.

Let’s think about some of the factors involved in cosigning a loan. Is there a right way to cosigning a loan?

There really is a right way and a wrong way to cosign a loan for someone. The number one thing to remember is to not allow emotion to cloud your judgment. Let me give you an example; I work with the women at a community Women’s Shelter. I met a young lady there who was burdened with a large debt because she cosigned for someone. That someone was her boyfriend whom she was very much in love with. She loved him so much that she cosigned a $35,000 loan for a slightly used Lexus. Within two months they had broken up and he had disappeared with the car. He stopped making payments and the vehicle was taken to another state. The lender was unable to locate the car for repossession. The debt has been placed on her credit as a collection for the $35,000 loan plus collection fees. All because she let emotions cloud her financial decision making.

We love our kids and we want to help them get established in the world of credit. Cosigning on a loan is a great way to teach your kids financial responsibility. It will help them start their credit file with solid information lenders want to see. Getting your kids started in credit correctly is one of the best gifts you could give to them.

I like to think we know our kids pretty well and can judge if they will be responsible enough to make all the payments on time. But it is also important not to burden them with a debt they cannot afford which can turn into a debt where you become ultimately responsible for it. We need to understand their income and expenses to be certain they can afford the payments. You are not a bank, but it is important to understand your child’s finances; perhaps they could create a budget plan for you. It can show how much they have coming in salary and what their basic expenses are going out. It gives you an opportunity to have a good conversation about making payments on time and the importance of building credit for their financial future.

One last thought, if your cosigned borrower makes all their payments on time and the loan pays off correctly at the end, your FICO/Credit Score will benefit along with that person who you cosigned for. Every payment they make on time benefits both of you. That’s a beautiful thing!

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Auto Sale at Meriwest Credit Union – Main Office

May 19th - 9AM to 5PM
May 20th - 10AM to 6PM
5615 Chesbro Ave, San Jose CA 95123

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To get pre-approved for financing, call Meriwest Credit Union at 877-MERIWEST or online at Meriwest Credit Union Auto Loans.