The most common reason you might be asked to cosign a loan with another person is probably the person is unable to obtain a loan due to poor or no credit history. Assisting someone is this manner is not necessarily a bad thing. You need to understand that co-signing means you are taking responsibility for borrower’s loan as well and it can potentially hurt your credit history if a problem occurs.
Before making the decision of co-signing if you find yourself in such a situation, below are listed things you should know before you co-sign the loan.
Who is the borrower?
Considering who is asking you to co-sign the loan is very important. You need to be sure of how responsible the person is and also you need to be sure of the person’s determination to return the loan as soon as they can. Even if this is someone near and dear to you, it’s really important to logically consider who you are entering into an agreement with because your wallet and credit history are on the line.
What is the purpose of the loan?
The most times co-signing is entertained is when it comes to getting a loan for a car or a home. These loans are preferred because there is physical collateral that is being borrowed against although they can be hefty in price. You may want to reconsider if the borrower asking you to cosign wants to take out a new credit card or a loan to pay off another loan; these can be signs of previous irresponsible behavior with credit.
What is the borrower’s capability to repay the loan?
When someone asks you to co-sign with them on a loan, it is a good idea to ask them to provide proof of regular income and what their plan to repay the loan is. You do not want to enter into an agreement with someone who does not have a current job, has a spotty employment history, or is not sure of their plans to make sure the loan is paid back in full on time.
What is your relationship to the borrower?
It is important to consider your relationship with the borrower before you co-sign. Co-signing can be a positive experience and can also be a sour experience that can break your relationship with the person. Weigh the pros and cons of how either outcome can affect your relationship before you co-sign.
What is your plan if the borrower cannot repay the loan?
One rule to abide with in this kind of situation is to hope for the best and plan for the worst. Anything can happen even as you hope the person you cosigned with pays back their loan with no issues. You should set aside a plan for such eventualities. Look into if the lender you’re considering will allow you to exit the loan at any time. You also will want to be sure that you can financially take the hit if the borrower stops being able to pay; otherwise, your credit history can be severely impacted and take a long time to recover.
What are the consequences if the debt is not repaid?
Like any situation in which debt repayment arrangements are not honored, if the cosigner does not repay their debt, there will be consequences for you both financially. Some issues you may be dealing with in the case of non-payment or continued late payments are:
- Tax penalties
- Wage garnishment for unpaid amounts
- Legal action, suing
- Credit score lowering
- Additional penalties and interest
- Repossession of property
Complication of future loan approvals debt collection