If someone has asked you to cosign a loan for them, or if you are having trouble qualifying for a loan, you must read these 7 tips before you sign anything!
What Does It Mean To Cosign A Loan?
Quite simply, cosigning is the act of two people signing an agreement to a lender in order to guarantee payment. If one person does not meet the lender’s criteria, a second cosigner may be able to help secure the loan. A cosigner could be a family member, close friend, or a business partner.
The reasons a cosign loan may seem necessary:
The primary borrower’s credit history or score may not meet the lender’s requirements
A cosigner may be able to qualify for a lower interest rate
The primary borrower may not have enough income
The primary borrower may have too many liabilities, i.e. outstanding debts, car loans
If you are the cosigner, you are legally required to repay the loan if the primary borrower is unable to. With that being said, here are 7 important tips to consider before you sign for that loan.
1. Are You Able To Afford The Monthly Payments On Your Own?
I understand that the agreement between you and the primary borrower may be that you are not responsible for the loan or monthly payment. Unfortunately, the lender does not see your agreement in the same way. If for some reason the primary borrower is unable to pay the loan because of a job loss or bad budgeting, you are on the hook for the loan as much as they are.
Any late fees and other applicable fees that are tacked on will also be your responsibility to pay back if the primary borrower is unable or unwilling.
2. Do You Need A Loan In The Future?
If you plan to apply for a loan for a large purchase in the future, potential lenders look at your liabilities. The loan you cosigned counts against your credit until it is paid in full. The outstanding loan may keep you from being able to take out more credit for your own personal matters.
3. Communication With You Is Limited
If you cosign a loan, you will have limited information given to you on a monthly basis. The normal loan statements will be sent to the original primary borrower. If the original primary borrower is missing payments or routinely late on payments, a large amount of fees may be issued to the loan without your knowledge. You can request to be notified of any late payments so you can avoid this situation, but it is at the discretion of the lender.
4. Your Credit Score Will Be Impacted
According to Experian, your credit score will also be impacted when you cosign a loan. The initial issuance of the loan can negatively affect your credit, as can late payments or defaults.
5. Are You Enabling Bad Financial Behavior?
Identify the true reason you are cosigning for the loan. If the primary borrower has a bad credit history, how can you trust them? There is a reason the lender deems they are too risky to loan money. Ensure your decision is not based on emotion. If a family member is requesting help, have them prove to you they are financially stable and on the correct path.
If they are irresponsible with money now, don’t think this loan will change their bad habits! They must be able to handle a small amount of money before they can handle a large amount. Don’t be fooled into thinking that they will change their money habits because of this loan.
6. Consequences For Non Payment
If the primary borrower is unable to pay the loan due to financial issues and you are unable to pay the loan, lenders can sue you for payment or garnish your wages. Lenders can use the same tactics on you to recoup debts as they can for the primary borrower.
7. Relationships On The Line
Keep in mind that your relationship with the primary borrower is on the line when you cosign a loan. The best case scenario is the primary borrower is able to repay the loan without any issues. I encourage you to think about other scenarios that involve the borrower being unable to pay or late on payments. This will impact both of your credit histories and will create even more tension between you two. The stress that comes with money issues between family members may not be worth the risk.
Before you cosign for a loan, ensure you have all the facts. How close is your relationship with the primary borrower? Do they have their financial life in order or are they still working on it? Don’t enable bad financial behavior by giving them access to even more money in the form of a loan. If you do make the decision to cosign, only do so if you are able to take over the loan payments in the event the original borrower is unable to. If you are not worried about their financial ability, job loss is also an unknown variable that can affect anyone.
Thank you all for taking the time to read these 7 tips to consider before cosigning a loan! Please do me a favor and subscribe below so you never miss one of my posts! Also, if you still need your free budget printables, get them over here! Keep at it my friends, you work too hard to be this broke!