What is Co-signing?
Co-signing a loan is a way to help someone who can’t get a loan do so. When you co-sign on a loan, you are putting your name and your credit history onto someone else’s loan. This strengthens their loan application and often makes it possible for a person to get a loan that they would otherwise not qualify for.
If a person has a poor credit history or no credit history, they may not be able to get a loan and, if they can, the interest rate they are offered may be very high. In these cases, the lender may suggest that the individual find a co-signer. Having a co-signer can make it possible for the person to qualify for the loan or to get a lower interest rate than they would be able to get on their own.
However, when you co-sign a loan for someone else you are making yourself equally responsible for the loan. This means that, if the person whose loan you co-signed doesn’t make the payments, they become your responsibility. If the loan isn’t paid, it will negatively affect your credit rating and your credit score just as if you took out a loan yourself and didn’t pay it back.
Co-signing a loan is a serious act and it is one that should not be taken lightly.
Should You Co-sign a Loan?
Co-signing a loan can be a big help for someone. This is especially true when the loan in question is for something that could potentially change a person’s life, such as paying for school, transportation, or housing. If you co-sign a loan for someone, you are giving them an opportunity that they wouldn’t otherwise have.
Whether or not you should co-sign a loan for someone depends on several factors. However, one of the biggest is trust. If you trust the person that you are co-signing for, and you believe that they will be able to make the payments on the loan, then you may decide to co-sign.
It’s very important that both you and the person who you are co-signing for understand the reality of the situation. Co-signing a loan is basically the same as taking out a loan yourself. If you co-sign for a friend or family member, you’ll need to make sure that they make the required payments on time. After all, your credit history will be affected by what happens on the loan. If payments are made on time and the loan is paid off on time, your credit history (as well as the credit history of the person you co-signed for) will benefit. However, if the payments are not made, both of your credit scores will suffer.
This can mean that you’ll need to keep detailed track of the loan and make sure that the payments are being made. If you are not comfortable asking your friend or family member about the payments each month, and if they are not comfortable sharing this information with you, then you may not want to co-sign the loan.
In general, it’s often best to only consider co-signing for a close family member or a very good friend. You’ll need to make sure that you have a long-term relationship with someone – and a strong relationship – before you consider co-signing.
What to Pay Attention To
If you decide to co-sign a loan for someone, you’ll need to pay close attention to the terms of the loan. As mentioned, you should consider the loan to be the same as a loan that you applied for yourself. You’ll want to make sure that you know the terms of the loan, how often payments should be made, how much needs to be repaid, etc.
You shouldn’t just co-sign a loan blindly and then forget about it. Otherwise, the person that you co-signed for may miss payments, which will hurt your credit score and leave you financially responsible for the debt. If they cannot keep up with their payments, you may find yourself getting a call from a collections agency or receiving a “past due” notice in the mail. That’s why it’s so important to stay in very close contact with the person that you co-signed for.
If you co-sign a loan, you should prepare yourself for having to repay the loan yourself. While the person you co-signed for may very likely make the required payments, they may not, which means you’ll be responsible. If you haven’t made a plan to repay the debt yourself, you could find yourself in financial trouble.