What You Need to Know Before You Cosign a Loan!
You may be tempted to cosign a loan for a child, family member or friend to help them get a better interest rate on a line of credit or loan.
Certainly this is a big help to someone who cannot get credit on their own. However, it will also result in you ultimately taking on responsibility for it. Understanding the repercussions of cosigning a loan will help you decide if it’s really the best decision for you.
The main advantage to cosigning is that you can help someone else get the credit he or she needs. Know that this loan you sign for will appear on your credit as well as theirs. It will also have an impact on both of your credit scores – good or bad. The loan could also alter your debt-to-income ratio. This means even though you are not primarily responsible for the payments, your credit report will reflect the fact that you are a co-borrower or cosigner.
It is essential that you trust the person who you are cosigning for. Also understand that even if they are trustworthy, unforeseen circumstances such as death, serious illness, or job loss can happen to anyone. You must accept the fact that you may become responsible for the loan at some point. If the main borrower defaults, the creditor can come to you for payment. This means you could be in danger of having your bank account frozen, your wages garnished, and your credit score lowered because of this defaulted loan. Failure to pay by you or the borrower can even result in collection activity, including lawsuits. If this happens to you, consider speaking to an attorney who specializes in debt solutions to help determine your options.
Note that while some loans do allow you to remove yourself as a cosigner, this is usually a lengthy process. One can usually not be removed unless they have been on the loan for a while and the borrower is making regular payments towards it. Before you cosign, have a discussion with the borrower. Discuss their plans to ensure their ability to repay for the entire term of the loan.