7 Reasons NOT To Co-sign Someone Else’s Loan
One of the challenges for those with either bad credit history, or no credit history, is getting a loan. Getting a car loan, student loan, or sometimes even just a credit card will require a cosigner, and if a friend or family member is asking you to co-sign with them, you need to be very careful before saying yes.
Generally speaking, to protect your own financial security, you should avoid co-signing for any loan, no matter how trivial it may seem.
1) Who’s The Borrower?
As tough as it can be to accept, there’s a reason your friend or family member needs a cosigner. Either they lack enough credit history to qualify by themselves, or lender has determined that they are not responsible enough to qualify because of their current credit history.
Lenders have gotten pretty sophisticated at predicting an applicant’s likelihood of repaying a loan, so if they’re requiring a cosigner, it means they feel the person applying is to great of a risk on their own.
The important thing to remember is that these decisions are based on financial facts and data, and are not personal assessments of your friend or family member’s character.
2) There’s No Benefit
When you co-sign a loan, you take on all the responsibility of the loan, and get absolutely nothing in return. While helping out a friend or family member may feel good, from a financial perspective co-signing is all risk and no reward.
3) Payments Affect Your Credit
If you co-sign a loan, you become one-hundred percent as responsible for the loan payments as the person you’ve cosigned for. This means any late payments they make will be reported on your credit history and will impact your credit score.
Even worse, it’s not uncommon for notices of late payments to take several months or more before you’re notified. This means if and when you do find out, it’ll be too late for you to take action to prevent harm to your credit history.
4) Your Debt Level Increases
The debt you become responsible for when you co-sign for a loan increases your overall debt-to-income ratio. This can affect your ability to borrow and get approved for your own credit cards and loans.
When lenders look at your credit profile, they consider how much debt you are currently carrying, in comparison to your income, to determine if they want to lend you more money. If you’ve cosigned for a large amount, lenders may be reluctant to approve you for any new debt.
5) You Have Legal Liability
If the person you’ve cosigned for fails to pay back the money they’ve borrowed, the lender (or the collection agency they’ve hired) can legally come after you for the money.
This also means you can be sued for the debt in court and have a judgement entered against you. If this happens, your credit score will, essentially, fall off a cliff.
6) Your Relationship May Suffer
Even if you truly believe that the person you’re co-signing for will pay back the loan … what if they don’t? Putting aside the damage that could be done to your own credit and finances, think about how your relationship with that person would be affected if the worst did happen.
Another unfortunate, but common, scenario is if you and the person you co-sign for have a dispute or falling out before the loan is paid back. They could potentially ruin your credit and make you responsible for the loan because of hurt feelings or an attempt to retaliate for whatever argument occurred.
7) Getting Off The Loan Isn’t Easy
Once you’ve co-signed for a loan, you can’t just change your mind and decide you don’t want to be on it anymore.
Generally speaking, the only way to get your name off of the loan is if the primary borrower gets a new loan solely in their name. This means they’ll have to improve their credit enough to qualify on their own. It’s possible, but not quite as easy as it sounds.
Make The Right Choice For You, Not Them
While the friend or family member that’s asking you to co-sign probably isn’t trying to take advantage of you, you need to make the best choice for yourself.
Make sure you fully understand all the ramifications of co-signing before taking on that responsibility. If necessary, speak with a financial planner and get their advice. A financial planner can help you assess your own financial situation, credit history, and debt level to determine if co-signing is a good idea.
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