Should I Cosign on a Loan?
You’ve probably lent a friend or family member some money to help them out. Or perhaps you’ve been the borrower and needed some cash to help you out of a tight spot. It could have been for anything from lunch money to a car repair bill. We’re all human and we generally want to help out those we care about. But what if you’re asked to cosign a loan? That can be a whole different ball game.
THE PURPOSE OF COSIGNING
In today’s financial world, a person can’t always stand on their own two feet. Having a cosigner on a loan may be a requirement for those who have poor credit or are young and don’t have a credit history. Whether it’s for a student loan or an apartment lease, the lending institution may require the borrower to have a cosigner. A cosigner guarantees that they will make payments on the loan if the borrower defaults. Hopefully this doesn’t happen, but of course there are circumstances where the cosigner ends up picking up the tab. In one particularly tragic case, a father was required to pay back his son’s student loans when the son died in a car accident. Why? The father had cosigned the loans.
WHAT HAPPENS IF THINGS GO WRONG?
Failing to pay back cash can destroy friendships and family ties. Cosigned loans will show up on your credit report and affect your credit score. If the borrower defaults on their loan and the cosigner can’t make the payments either, the results can be even worse. Your credit score could be lowered and perhaps ruined. According to a Motley Fool article you may end up paying higher interest rates and having a harder time getting new loans, among a host of other potential negative outcomes.
BEFORE AND AFTER COSIGNING A LOAN
Do your research before you sign the dotted line on somebody else’s behalf. Go over your budget and make sure you can handle the payments yourself. It could be a good idea to talk to a financial adviser. And there is nothing wrong with saying no. But what if you’ve already cosigned and things have gone wrong? You might feel angry at the person you helped and at yourself. You may be struggling with this new financial burden and already be getting collection letters. Contact us for a free consultation and let us help you.