Have you been asked to co-sign on a loan for a friend or family member? When asked to co-sign on a loan, your first reaction may be hesitation, and rightfully so. You may trust, like, and love the person asking you to co-sign, but at the end of the day, you are taking on a significant amount of risk – directly proportional to the amount of the loan, to be exact. The one certainty in life is life is filled with uncertainty, so understanding your risks before signing is the smart and responsible thing to do. Over the years, we’ve helped a fair share of clients with bad loans they’ve had the misfortune to co-sign. In this article, we’ll examine the risks involved with co-signing on a loan, so you can have clarity before inking your signature.
The fact that you become responsible for a loan you co-sign may seem obvious, but it can’t be stressed enough how important this fact is. When you co-sign on a loan, you’re not just “lending” your good credit reputation – you’re promising to pay the debt obligation if the person who originates the loan is unable to. This includes late fees and collection costs. Before you co-sign on any loan, make sure you’re able to financially take over the loan if you have to – because you’re legally obligated to do just that.
You’re Putting Your Credit on the Line
When you co-sign on a loan, both the loan and the payment history will show on your credit reports. You will likely see a temporary hit to your credit score. Most importantly, any missed payment by the borrower will negatively impact your score. Considering payment history has the biggest influence on your credit scores, this is a big risk if the borrower can’t be relied on to make timely payments or let you know when they’re about to miss one.
Your Credit Access May be Affected
When you co-sign on a loan, your total debt levels are increased. Even though it’s not your loan, it is in the eyes of a creditor. A creditor may see the loan and deem your total debt to income ratio as too high and choose not to extend credit to you when you need it.
You Become Open to Potential Lawsuits
In some states, if a lender does not receive payments they can try collecting money from the co-signer before suing the primary borrower. This can happen if the borrower has missed several payments. A lender may start to consider legal action after the debt is between 90 and 180 days past due. If the worst happens, and you are sued for nonpayment, you’ll be held responsible as the co-signer for all costs – including the attorney’s fees.
It May Damage Your Relationship
In most loan co-sign situations, the co-signer is signing for a loved one or close friend. The borrower may start out by demonstrating that they are responsible and just need a little help to get the loan approved. But financial and personal situations change all the time. In the end, if you’re left paying off a massive loan, it can cause severe strain on relationships you cherish.
Other Options VS. Co-Signing
Before you co-sign, always make sure you’re capable of repaying the loan if the borrower defaults. If you have enough capital, you could consider giving the friend or family member a personal loan for part of what they need. A lender may be willing to loan the other half of what is needed. This strategy will enable the borrower to make the purchase, while you avoid the risks of co-signing.
If you do decide to co-sign on a loan, here are some things to consider before you sign:
- Can you afford it? Make sure you have the money to take over full payments if the debtor defaults.
- Prepare for default. Ask the creditor to calculate what you might owe if the loan goes into default. Try to negotiate the terms of the loan to limit your liability.
- Ask the creditor to contact you if the borrower misses a payment.
- Get your own copies of all loan documents.
- Check what rights your state affords co-signers.
Do You Need Help With Credit Repair?
If you have co-signed on a loan that defaulted and it negatively affected your credit, we can help you get your credit back in good shape. Give us a call today, and we will walk you through all the different strategies you can take to expedite your credit repair.
1 (877) 772-7312