Cosigning a loan means agreeing to be held responsible for that loan’s repayment. Before taking on responsibility for someone else's loan, you need to review the requirements for being a cosigner. You should also understand what cosigning entails. This is especially true if you are planning on cosigning a loan for someone with a bad credit history. With that in mind, review the following considerations before agreeing to cosign.
Will They Pay?
You should cosign a loan for someone only if you are sure the monthly payments will be made. A lender will hold a cosigner financially responsible for defaulted loans. This is why many financial experts advise against taking on the obligations of a cosigner unless you are the loan applicant's parent or spouse. No matter how well you know a friend or family member, extending your credit to assist someone with a low credit score is inherently risky. Remember, a defaulted loan can negatively impact your credit history, which doesn’t bode well for monthly loan payments being made.
Know the Terms
Every loan is different. Before cosigning a loan for someone, make sure that you read and understand all of the loan's terms. You wouldn't take out a loan for yourself without reading the contract first, and the same should go for loans you help others get. Look over the repayment terms, interest rates, and all other loan conditions prior to signing the financing agreement. If any of the terms make you uncomfortable, do not cosign the loan. This will also allow the primary applicant the benefit of a second opinion.
Potential Consequences
There are both positive and negative potential consequences to cosigning a loan for someone. The positive outcomes are twofold, helping out someone who needs it and possibly improving your credit rating. As a cosigner, the responsibility you hold for the loan extends to the timely payments reflecting well on your credit score.
On the other hand, potential negative consequences are much more serious. As the loan's cosigner, the lender can require you to repay a loan if payments are neglected. Your credit score will be immediately negatively affected, and you could be out thousands of dollars. Because you signed the agreement, you have very little legal recourse against the primary person on the loan. These potential consequences should make you extremely cautious about cosigning a loan.
The decision to cosign a loan should be taken seriously. The loan terms and primary applicant's ability to pay should be considered carefully before any financing agreements are finalized and signed.
* Image Courtesy of FreeDigitalPhotos.net
