You may be tempted to cosign a loan for a child, family member or friend to help them get a better interest rate on a line of credit or loan. Certainly this is a big help to someone who cannot get a loan on their own but it will also result in you being responsible for the loan. Understanding the repercussions of co-signing a loan before putting yourself in that position will put you in the know long before potential issues.
By cosigning a loan you are pledging that you will pay the loan should the main borrower not be able to pay. This means that if the main borrower defaults, or does not pay that the creditor can come to you and request then require that you pay. Failure to pay by you or the borrow, can result in negative reporting on your credit or even collection activity including law suits. So this means that before you sign on the co-borrower dotted line, that you are sure the borrow has the ability to pay the loan back so the creditor does not come looking for you.
The main advantage to cosigning is that you can help someone else get the credit he or she needs. Know that this loan you sign for will appear on your credit and this have an impact good and bad. This means that the loan could alter your debt to income ratio. Meaning even though you are not primarily responsible for the payments, your credit report will reflect the fact that you are a co-borrower or cosignor. As a result trust the person who you are cosigning the loan for, but understand even if they are trustworthy they are not in the ideal financial situation so you must accept the fact that you may be responsible for the loan. If they default you can be in danger of having your bank account frozen, your wages garnished, and your credit score lowered because of this defaulted loan.
Also if the borrower is unable pay due to illness, handicap or death you are responsible for the loan. If you do wish to cosign a loan, make sure you understand the terms and what the process is (if it is possible) to get yourself removed from the loan, if need be. Note that while some loans do allow you to remove yourself as a cosigner, this is usually a lengthy process and one can usually not be removed unless they have be on the loan for a while and the borrower is making regular payments towards the loan.
The same repercussions also apply if you cosign a student loan for your child. This is a big risk, considering you do not know if your child will be able to find a steady job that pays enough to pay the loan payments. However you may help your child get a better interest rate on the loan.
Before cosigning a loan which is a big burden to carry, know if the borrow will be able to repay for the entire term of the loan and that you too can make the payments should the borrow default. Check to be sure you can get off of the loan at some point in the future, and note how it will be reported on your credit report. For younger or inexperienced borrowers, a discussion on budgeting and income and expense reality check can make the difference in the future success of the borrowing arrangement.
Anything you do sign, be prepared to pay it back if need be! Have you ever cosigned a loan? Share your experience below!