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Why You Should Think Twice Before Co-Signing a Loan

Treat Co-Signing a Loan Very Seriously

If a friend or family member is having difficulty getting a loan, they may ask you to co-sign the loan with them. This is often the case with those who have poor credit, no credit, or unreliable income. When you co-sign a loan, you are “lending” your good credit to the person. This means they might be able to get a loan that they otherwise wouldn’t have been able to get, or they may get a lower interest rate thanks to having a co-signer.

However, when you co-sign a loan, you promise to agree to pay off the loan if the primary borrower is unable to pay. This means you could find yourself completely responsible for making all the loan payments on your own. This is important to understand and something to strongly consider before you co-sign any loan for anyone.

While most people may want to help their friend or family out by co-signing their loan, it’s important to take the process seriously and think about it clearly before doing so.

Here are some things you may want to consider before co-signing a loan.

Find Out Why Co-Signing is Necessary

If someone asks you to co-sign a loan for them, find out why they want a co-signer. Are they hoping to get a lower interest rate? Are they unable to get the loan on their own because they don’t have credit? This situation often happens with younger people who have just finished school. They may have a solid income, but they’re unable to get the loan they want because they don’t have a lengthy credit history.

Pay special attention to situations where a person needs a co-signer because they have bad credit. If they’ve defaulted on loans or missed payments in the past, this will hurt their credit score and make it tough for them to get a loan. If this is the situation you’re faced with, you’ll want to seriously think about whether you want to co-sign. Remember, you will be responsible for the loan payments if the other person cannot pay.

Check if Your Friend or Family Member Can Pay

It’s important to have a truthful conversation with the person asking for a co-signer. Can they make the payments on this loan? Do they have enough room in their budget? Do they have a plan for what they’re going to do if they are faced with a sudden unexpected expense or emergency? These may sound like personal questions, but it’s important to have this information before you co-sign anything.

Make Sure You Can Pay

Not only will you need to make sure that the primary lender can repay the loan, but you’ll also need to determine if you can make the payments if you end up in a situation where you’ll need to do so. If it would hurt you financially to have to make these payments, or if you’re not sure if you’d be able to make them at all, then you may want to reconsider co-signing the loan.

Know the Terms of the Loan

Just like you should always make sure you read and understand the terms of any loan you take out yourself, it’s also important to know all the details of any loan you co-sign. After all, you could end up responsible for paying the loan.

It’s also important to take note of the responsibilities of the co-signer, such as when you will be contacted or what circumstances may require you to make payments.

Consider your Own Credit Score

Any loan that you co-sign will appear on your credit report, even if you’re not the one making the payments. This means that any missed payments or late payments will be reflected on your credit report, and this can negatively affect your credit rating.

Having this loan on your credit report may also affect your debt-to-income ratio. Your debt-to-income ratio is the percentage of your monthly gross income that goes toward paying debts. Lenders do not want to lend to people who are carrying large amounts of debt compared to their income, since they believe a person in this situation is likely to overextend themselves financially. Since the loan you co-signed will appear on your credit report, it could be more difficult to get a loan for yourself in the future. That’s because the lender may believe that you won’t be able to handle making the payments on the new loan as well as the loan you co-signed.

Most co-signers are required to remain on a loan until it’s paid off or the loan is refinanced under the primary borrower’s name alone. This means it could appear on your credit report for quite some time.