Should I Cosign on a Loan?
Have you been asked to cosign on loan? Are you wondering if there are ways to protect yourself as a cosigner? To determine whether it is a good idea to cosign a loan for a friend or family member, you should consider the pros and cons. More importantly, however, you need to know your rights, responsibilities, and the risks associated with cosigning a loan.
What it Means to Cosign on a Loan
A cosigner is making a guarantee to the lender that they intend to repay the loan. The responsibilities mentioned in a Notice to Cosigner can include paying late fees if the primary borrower doesn’t make payments on time. In addition to paying the debt in full, the primary borrower fails to make payments and pay fees associated with collections.
If you’re considering becoming a cosigner, consider all risks as well. Some of the most common include that your credit score could take a hit. Late payments or default on a loan could leave you with a negative mark on your credit report and lower your credit score. Your debt-to-income ratio also increases when you become a cosigner. The loan for which you cosigned reduces your debt-to-income ratio. If your ratio is too high, you may not qualify for your own loan if you needed it. In the unfortunate event that the primary borrower fails to make timely payments or defaults on the loan, your personal relationship may suffer.
Benefits as a Cosigner
There are many things to consider when becoming a cosigner, but there are also benefits as well. By becoming a cosigner, you are likely helping a friend or family member. If you have been asked to help obtain a loan, you will assist in building their credit or acquiring a necessary item that they may otherwise be out of reach. The primary borrower won’t be the only one to build their credit. As long as the loan is paid as agreed, you’ll have another account in good standing to improve your credit score.
Protecting Yourself as a Cosigner
If you decide the benefits outweigh the risks, you may be able to find peace of mind with the following options:
- Request access to the loan account to track payments.
- Work out a legally-binding contract between yourself and the other borrower that outlines responsibilities and contingency plans in the event of missed payments or default.
- Ask the lender about cosigner release options after a certain number of on-time payments.
To learn more about the consigning process and if you should consider it, talk to The Credit Company. At Credit Care, we help change lives one credit score at a time. You can talk with one of our advisors by contacting us online here or at 314-485-9940 today!