Cosigning a loan can be a way to help out someone currently dealing with some financial constraints. However, doing so can be risky. Around 40 percent of people who co-sign loans end up losing money because the borrower didn’t repay the full loan.
Here are some things to consider if you’re wondering if you should really cosign a loan.
Are You Capable of Paying This Loan If the Primary Borrower Doesn’t?
Cosigning a loan is a commitment. When you become a cosigner, you’re saying you’ll be there to make payments on the loan if the primary borrower doesn’t fulfill their obligation. If that’s news to you, definitely take some time to learn more about cosigning before you go ahead with anything.
It’s important to take an honest look at your financial situation when evaluating whether you’ll be okay if the primary borrower doesn’t live up to the obligation. The bigger the loan (and less steady the asset) the more risk you put on yourself by becoming a cosigner.
How Will This Affect Your Credit?
It’s also smart to consider how this action will affect your credit score. After all, your credit history determines how easy it is for you to get a loan, as well as the interest rates you’re offered with a loan.
If you’re a cosigner on a loan and the primary borrower doesn’t pay, that’s going to ding your credit, especially if you’re not able to step in and stop the bleeding. There are some other ways being a cosigner can have a negative impact on your credit, even when the bills are all paid on time.
Credit utilization is one of the biggest factors used in determining your credit score. This is the amount of credit you’re currently using versus the amount you’re allotted by lenders. Being a cosigner can throw your credit utilization ratio out of whack—especially if it’s a larger debt. Consider how your credit utilization might change before co-signing any loan.
What Are Your Other Options?
It’s a good idea to explore some other options before deciding to cosign a loan with someone. Depending on the situation, simply giving or loaning the person money, instead of signing for a loan with them, can be the better choice. This way, you won’t have to worry about being held liable for payments if something happens with the primary borrower.
Another option is to figure out why they aren’t able to take out the loan on their own and help them position themselves to do so. If they have ongoing problems with their credit, it might be in their best interest to try a debt relief program. Freedom Debt Relief is one of the most respected names in helping people overcome debt issues.
How Essential Is the Purchase In Question?
You should really consider the magnitude of the purchase you’re cosigning before going through with it. If you’re really helping someone close to you get something essential they otherwise couldn’t without you as a cosigner, then it’s worth still considering the pros and cons of doing so. On the other hand, cosigning a loan so your step-brother can buy a boat might not be on the same level of worthiness. Get as many details about what you’re actually cosigning for before agreeing to anything.
What’s Your Relationship with the Borrower?
Cosigning a loan is a big deal. It’s the financial equivalent of that thing in movies where people cut their fingers to share blood. You’re really putting your neck out for someone else.
With that in mind, it’s obvious cosigning isn’t something you want to do for just anyone. How long have you known this person? Cosigning for a child or family member might be a reasonable act. But you really should consider the potential ramifications for co-signing for someone you don’t know as well. You’re going to be stuck with the bill if they don’t pay.
There’s a lot to think about before you decide to cosign a loan. Working through these points will help you arrive at a decision that will be better for your credit and finances.