Considering Co-Signing a Loan? Read This First
If you’re ever asked to co-sign a loan with someone, most likely it is because they are unable to obtain a loan due to poor or no credit history. It’s not necessarily a bad thing to assist someone in this manner; however, when you co-sign, you are essentially taking responsibility for borrower’s loan as well and it can potentially hurt your credit history if a problem occurs.
It’s important to consider certain factors before making a decision if you find yourself in a co-signing situation. Below, we’ve listed what you need to know before cosigning a loan.
Who is the borrower?
It’s important to consider who is asking you to co-sign on a loan. How responsible do you feel the borrower is and how determined do you believe they are to honor the terms of the agreement? Even if this is someone near and dear to you, it’s really important to logically consider who you are entering into an agreement with because your wallet and credit history are on the line.
What is the purpose of the loan?
Often times, co-signing will be entertained when it comes to taking out a loan for a car or home. While these loans can be hefty in price, they are almost preferable because there is physical collateral that is being borrowed against. You may want to reconsider if the borrower asking you to cosign is wanting to take out a new credit card or a loan to pay off another loan; these can be signs of previous irresponsible behavior with credit.
What is the borrower’s capability to repay the loan?
When someone asks you to co-sign with them on a loan, it is a good idea to ask them to provide proof of regular income and what their plan to repay the loan is. You do not want to enter into an agreement with someone who does not have a current job, has a spotty employment history, or is not sure of their plan to make sure the loan is paid back in full on time.
What is your relationship to the borrower?
Considering your relationship to the borrower can be important. While co-signing with someone can certainly be a positive experience for you both, it can also sour a relationship pretty quickly if it doesn’t go well. Before agreeing to anything, it’s essential to weigh the pros and cons of how either outcome can affect your relationship.
What is your plan if the borrower cannot repay the loan?
A good rule of thumb in situations like this is to hope for the best, but prepare for the worst. While it’s hoped that the person you co-signed with pays back their loan with no hiccups or issues arising, anything can happen and you should have a plan for if things go wrong. Look into if the lender you’re considering will allow you to exit the loan at any time. You also will want to be sure that you can financially take the hit if the borrower stops being able to pay; otherwise,
What are the consequences if the debt is not repaid?
Like any situation in which debt repayment arrangements are not honored, if the cosigner does not repay their debt, there will be consequences for you both financially. Some issues you may be dealing with in the case of non-payment or continued late payments are:
- Tax penalties
- Wage garnishment for unpaid amounts
- Legal action, suing
- Credit score lowering
- Additional penalties and interest
- Repossession of property