Cosigning a loan offer can be a good way to help someone you care about and ensure that they have the money they need to purchase what they want.
However, it’s not as simple as just filling out some paperwork and signing your name to it.
That person will still be on the hook for the loan if they stop making payments, and that could affect your credit score as well.
The basics of cosigning
Cosigning a loan can be risky if you don’t know what you’re getting into. Here are the basics of cosigning:
-Cosigners have the same responsibility as the borrower for paying back the loan.
-If a cosigner isn’t able to pay off their share, they will be responsible for repaying that part of the debt.
-Consumers should think carefully about whether they want to risk their credit history on someone else’s decision.
-Cosigning is not an option for those who can’t afford to make payments.
-If someone has poor credit and wants to borrow money, it may make more sense in some cases to find a co-signer with good credit rather than taking out a bad loan and risking ruining their own credit score.
A cosigner must understand that any missed or late payments on the original account will also affect his or her credit.
Cosigned loans may be appropriate for certain people, such as parents looking to help their children buy a home or individuals without enough income but who have decent credit scores.
For others, however, cosigning might not seem like such a great idea after all.
The risks of cosigning
Cosigning can be risky because it puts you on the hook for the full amount of the loan if the person who took out the loan doesn’t pay.
It’s also not just about being liable for paying back what’s owed–you’ll need to cover all of their payments, too.
If they fall behind, you may have your own credit score suffer from late or missed payments on your report.
You could end up with damaged credit and some serious debt that has nothing to do with you.
And if the cosigner dies before repayment is complete, there will be nothing left in the estate to repay creditors after funeral expenses and other debts are paid off.
The cosigner’s estate could then be pursued by creditors. But don’t let these risks stop you from considering becoming a cosigner.
Just make sure you understand how much risk you’re taking on before signing any paperwork
The benefits of cosigning
Cosigning a loan offer can be an effective way to help someone you care about get the funds they need.
However, it’s important that you’re aware of the risks before taking on this responsibility.
For example, cosigners are legally obligated to repay the debt if their loved one defaults. They may also be held liable for any missed payments or late fees accrued by their loved one as well as legal fees and collection costs.
If your loved one is struggling with their finances and refuses to seek financial counseling, don’t feel pressured into cosigning on a loan just because they want you to.
Consider other ways of helping them financially such as giving them money so they can rent a new apartment instead.
If you still want to cosign on a loan, read through all the paperwork carefully to make sure everything is in order and discuss any questions you might have with the lender.
If your loved one has difficulty making payments, ask the lender if there are options like changing the due date, negotiating how much needs to be paid monthly or making payment arrangements for when things improve.
How to decide if you should cosign
Cosigning a loan offer is not always the best idea. It is important to weigh the benefits and costs of cosigning the loan before you make your final decision.
If you are considering cosigning a loan, ask yourself these questions:
-What would happen if I defaulted on this contract? How would that affect my life and the lives of those around me?
Is this person likely to be able to repay this debt?
What are their prospects for financial success or what will happen if they don’t succeed in achieving their goals?
If the borrower does default, how much money am I willing to lose or put at risk?
And how much risk am I comfortable with taking on?
-Does it seem like this person needs help from someone who can provide some stability and security in his/her life?
How well do you know the borrower?
Do you trust them enough to believe that he/she will stick with it long enough for it to pay off?
-Would you consider giving the person advice about other options besides borrowing money?
Can you offer moral support to this person so that he/she doesn’t have to feel alone during such a difficult time?
Cosigning is an agreement where one party agrees to take responsibility for another party’s obligations if the latter should fail to meet those obligations.
If both parties agree, then there’s nothing wrong with lending one another support.
But it’s still important for each party to consider all of the potential consequences beforehand.
How to protect yourself if you do cosign
If you do cosign on a loan, make sure you have enough savings in case something happens. If the borrower suddenly defaults on their payments, cosigners are still responsible for paying back the full amount of the loan.
To protect yourself, make sure you have at least six months’ worth of expenses saved up in case of emergencies.
Never put your own home or other valuable assets as collateral on any loans where someone else is the primary borrower.
And when it comes to your credit score, don’t let a bad credit history affect you too much if you’re not applying for a loan.
There are ways to fix bad credit scores and many companies offer free credit score that show how your score has changed over time so you can see whether or not it’s improving!
When you sign up with one of these, they’ll usually also give you some recommendations on what steps to take next.
If your credit score is good, but could be better, try getting a secured card which will require an upfront deposit
(which will become the limit on what you can spend) but won’t require any ongoing monthly payments.
Lastly, never sign anything without reading through all the terms and making sure everything is clear.