The Pros and Cons of Cosigning a Loan

 In Cosigning

There are few things critically important to your financial future. This includes protecting your credit score and keeping it high. A credit score reflects your credit report and is an easily digestible number that indicates how well you’ve handled your financial responsibilities and if a company can and should trust you by granting you a line of credit with them. With a high credit score, the world is your oyster, with a low one, you’ll find it challenging to buy a car, rent an apartment, or open a credit card, but we all have to start somewhere, and most of us begin our first line of credit with a cosigner.

Getting Started

Once you’ve worked hard to build up your credit score, what should you do if someone approaches you and asks you to cosign one of their loans? What are the pros and cons to you for this decision, and can you protect yourself in the event something goes wrong?

The apparent fears when cosigning a loan are that your credit score is on the line when you do, and you are responsible for the full loan value. You are essentially lending your credit score to another person while promising to pay back their debt in the event they cannot meet their financial obligations. Before cosigning any loans, make sure you know your finances and your limitations. Are you capable of paying off this loan if the payee cannot make their payments?

Another downside to cosigning a loan is that your credit score will reflect this by showing additional investments under your name. This may affect your access to further lines of credit for yourself until the loan is paid in full. Furthermore, if the person you cosigned the loan for defaults on their payments, not only will your credit score take the hit, but in some, but not all, states, you can be sued by the lender. This could find you not only on the hook for the original loan amount but also all late fees and penalties as well as attorney fees from the legal proceedings.

Clearly, in the worst-case scenario, you will not only have suffered financial hardships from this loan. You will likely have damaged a close relationship with a friend or family member to the point of breaking. This may leave you without the original link of trust that brought you to cosign the loan in the first place.

Why Cosign A Loan?

The reason is relatively simple. Many first-time loan seekers do not qualify on their own because they have no credit history. Students taking out loans for university or trade schools often require a cosigner to begin their studies. Young people starting in life who need a car, a job, or rent their first apartment, sometimes need a helping hand. Also, people starting over after a life-changing event may need a little extra help getting back on their feet. Cosigning a loan for these people can change their lives, and we all want what’s best for everyone. If this person is responsible and makes regular payments until the loan is paid off, your credit score will reflect this.

How To Protect Yourself

Make sure that you have access to the loan and the payment history. Online access allows you to do this without having to badger the loan holder for an update constantly. Be sure to stay in constant contact with the person you cosigned for. Ask the bank to notify you immediately in the event of a missed payment so you can protect your credit score. Finally, make sure you plan for the worst. Even the most responsible among us can encounter unplanned hardship that sets us back. Set aside money in case you find yourself on the hook for the payments. While it is possible to be removed as a cosigner, it is far from a simple process. Prepare yourself to make payments on the loan, and remember you chose to cosign.

Before making any significant decisions, consult with your financial experts to make sure you are prepared for the financial ramifications. Also, prepare for the benefits of this loan before you sign. You must protect yourself from all possibilities, and remember, cosigning a loan can change someone’s life if done responsibly. Still, you shouldn’t put your financial future, or that of your family’s, in jeopardy, if you aren’t sure.

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