Cosigning on a Loan? What You Should Know First.
There are many reasons why people are turned down for credit:
In some cases, when people do not meet a lender's borrowing requirements, they may qualify for credit if they have a cosigner or a co-applicant. Both a cosigner and a co-applicant are responsible for repaying the debt in full if the primary borrower does not pay. A co-applicant, however, is usually someone who is making a purchase, like a home or car, with the other applicant. A cosigner is simply using his or her good credit to guarantee the repayment of the loan.
A family member or friend may ask you to cosign a loan if they're not creditworthy in the lender's eyes, but before you agree, it's important to understand what your responsibilities are and how cosigning can affect your credit. And consider this-the FTC describes cosigning as taking a risk that a lender won't.
Understanding What it Means to Be a Cosigner
There are many misconceptions about what cosigning a loan means. It's important you know exactly what you're agreeing to before you cosign.
The Financial Effect of Cosigning a Loan
Even if the borrower you cosign for makes all his or her payments on time and in full, cosigning a loan does affect your credit. The total amount of the loan is considered as your debt and factored into your debt-to-earnings ratio (how much you owe compared to how much you make) when you apply for credit on your own. That means that cosigning on a loan can lower your credit score and limit the amount you can borrow.
If the borrower does not repay the loan and you are not notified right away, the missed payments are recorded on your credit report as well and can hurt your creditworthiness.
Before you cosign on a loan, think carefully about the risks and what the loan can do to your good credit. It's not just about helping someone out, it's about your own financial wellbeing too.
This article is for informational purposes only. For personalized financial advice, you should contact a qualified financial advisor.