What you need to know before cosigning a loan
Cosigning a loan can put your finances at risk, so it’s important to think through your decision carefully before signing on the dotted line.
Although cosigning can be useful in certain situations, it can also lead you into serious financial trouble if you’re not careful about what type of loan you cosign and how much you’re cosigning for.
Before deciding whether to cosign, make sure that you have thoroughly considered all of these things when cosigning a loan.
You’re legally responsible for the debt
Cosigning a loan is both an act of generosity and one that can be risky.
You’re legally responsible for the debt, so if the borrower doesn’t repay the obligation, then it becomes your problem.
You could lose your house, car or anything else that you own.
Your credit score will also take a huge hit and make it difficult for you to obtain future loans. The cosigner must be able to provide proof that they are financially stable in order to avoid these repercussions.
As well as this, they should have an excellent credit rating which is free from any negative marks such as defaults or bankruptcies.
If the person does not meet these criteria, then the lender may refuse their request.
The best way to protect yourself against the potential risks of being a cosigner is to get all agreements in writing before agreeing on lending terms.
Additionally, cosigners should consider whether they want to include personal guarantees in the contract.
If so, then they’ll be liable for repayment if things go wrong and the borrower cannot pay back their obligations.
When considering whether or not to agree to become a co-signer, ask yourself: Can I afford this liability?
You should also talk with an attorney about potential ways of protecting your assets in case something goes wrong.
The borrower’s payments affect your credit
Cosigners are responsible for making payments on the other person’s debt if that person defaults.
If the borrower stops paying their debts, the lender will contact the cosigner and ask them to start making payments.
This can affect your credit score, because it will look like you’re now having trouble paying your own bills.
It can also cause problems with your other loans or credit cards.
For example, if you have an auto loan and stop making monthly payments on time, the bank may go after your cosigner for the money instead of giving you another chance.
So while they might seem like a good idea at first, there are plenty of downsides to consider before signing up as a co-signer on someone else’s loan!
If you don’t think you’ll be able to make all the payments if the borrower defaults, just say no. It’s not worth risking your financial security.
Plus, even if you do agree to cosign and something goes wrong, there are some steps you can take to minimize damage.
For example, make sure the amount is small enough that you won’t regret loaning out some cash.
You could be sued if the borrower doesn’t pay
Cosigning on a loan is an act of trust and responsibility. If the borrower fails to make payments, the cosigner will be liable for any debt incurred.
Furthermore, if the borrower declares bankruptcy, the cosigner is responsible for any unpaid debts as well.
The cosigner could also face having their personal credit score downgraded due to late or missed payments by the primary borrower.
In some cases, it may not even be worth it financially.
The interest rates on some loans may be so high that they actually exceed the benefits gained from being a cosigner.
However, this may still work out in your favor if there are tax deductions available for borrowers paying interest.
For instance, student loan interest is deductible up to $2,500 per year for both the primary borrower and co-signer.
Additionally, mortgage interest can be deducted up to $1 million over the life of the loan (up to $100,000 each year).
The most important thing when considering becoming a cosigner is knowing all possible ramifications before signing on the dotted line.
It may be difficult to get your name off the loan
Cosigning on a loan can be tempting when your loved one needs help. However, it is important to consider the potential consequences before agreeing to sign on the dotted line.
It may be difficult or impossible for you to get your name off the loan if things don’t work out as planned.
Plus, if the person that needs help defaults on their payments, then it will affect your credit as well and could make it difficult for you in other financial situations.
But, if they do keep up with the payments, then you will have successfully helped someone close to you.
Before making a decision about whether or not to cosign on a loan with someone else, make sure to talk through all the pros and cons together!
If you still feel like it’s something that would benefit both parties involved, then by all means go ahead and sign on the dotted line.
If anything does go wrong down the road, at least now you’re aware of the risks.
As long as everything goes smoothly, there are benefits to cosigning such as improving the credit score of the borrower (even though it won’t be yours) and having an opportunity to practice good money management skills.
With any luck, everything should turn out okay and you’ll end up helping someone you care about who needed some assistance.
Make sure you can afford it
Cosigning a loan is an incredibly generous and honorable thing to do for someone, but it can also be really risky.
Before you agree to cosign on anyone else’s loan, make sure that you can afford the monthly payments.
Some financial advisers recommend checking your credit score and budgeting your own monthly expenses before agreeing to take on this responsibility.
Keep in mind that if the borrower stops making payments, you will become responsible for making them yourself.
Plus, some creditors may not let you pay off your share of the debt without paying off their portion as well.
You’ll have to weigh whether or not you’re willing to take on these potential consequences when deciding whether or not to cosign a loan with someone else.
If you are going to cosign, talk to the lender about how they would handle your situation if you were unable to continue making payments.
They should tell you how much time there would be between when they would contact the other person who owes money on the loan and when they would contact you, so that you could prepare accordingly.