Cosigning a credit card or loan for someone else comes with a lot of responsibilities you should be aware of. After going through this article, feel free to express your unwillingness to go on with the arrangement. If not properly managed, it can cause you more harm than you bargained for. Cosigning is a big decision that should not be taken lightly. Here are 7 things to know before cosigning for someone else.
They Need a Co-Signer Because They Can’t Qualify on their own
Getting approved for a credit card and loan requires a good credit history. The reason a person can’t qualify is either because they have a history of bad payments or they don’t have credit at all. It’s very risky to cosign for this kind of person even if it’s a loved one. If the creditor requires a co-signer, they don’t believe your loved one can or will pay on time. Remember, their conclusion is based solely on facts and data about your loved ones spending habits, not about feelings or character assessments.
There’s No Real Benefit to You | Things To Know Before Cosigning For Someone Else
When you cosign for a loan, the other borrower actually gets the benefit of the loan. They drive the car, live in the house, or use a credit card. You might get a boost to your credit score — assuming all the payments are made on time — but it’s not worth the risk. And if you can qualify as a co-signer, your credit score probably doesn’t need much help.
Payments on the Co-Signed Account Will Affect You | Things To Know Before Cosigning For Someone Else
When cosigning for someone else, you’re just as responsible for the debt as if it were yours alone, only you don’t get the tangible benefit of what the debt is used for. Delinquency or late payments reflect on your credit report. This will impact your credit score and your ability to get approved for your own accounts.
Your Level of Debt Rises as well | Things To Know Before Cosigning For Someone Else
Since you’re both responsible for the loan or credit collected, your level of debt rises as well. The debt you co-signed will increase your debt-to-income ratio, affecting your ability to get approved for your own credit cards and loans. When creditors and lenders consider any application you make for a credit card or loan, they’ll consider that co-signed loan just like all your other debts. If the debt makes your debt-to-income ratio too high, your loan applications may be denied.
You’re on the Hook for Payments If the Other Borrower Defaults or Files Bankruptcy
By co-signing, you’re accepting responsibility for the payments if your loved one doesn’t pay on time. If the payments become delinquent, the creditor or its third-party collector will come after you. You can be sued for the debt and have a judgment entered against you (a judgment is one of the worst entries for your credit report). If your loved one gets the debt discharged in bankruptcy, they’ll be let off the hook for it. You, on the other hand, will be solely responsible for repaying the debt or forced to include it in your own bankruptcy.
The Relationship Could Suffer
If you still want to maintain that relationship, it might be better you turn down cosigning. Because this may not just your credit but your relationship if the worst happens and the other borrower misses payments and ruins your credit. Or, worse, what will happen if your relationship falls apart before the loan is paid off? You have to tread carefully when you’re mixing finances and relationships.
Getting off the Cosigned Loan Isn’t as Easy as Getting on It
You can’t get out of a co-signed loan simply because you regret it. Once a contract has been entered, typically the only way to get your name off the account is for the other person to get a new account in his or her own name. This means they’ll have to improve their credit enough to qualify on their own. It’s possible, but just not as easy as it sounds. If you decide to co-sign with someone, go into it knowing there’s a possibility that your name will be attached to the loan until it’s paid off.
If you cosigned for someone and you’re already regretting it, read this.
Cosigning is a big decision that should not be taken lightly. Here are 7 things to know before cosigning for someone else.