To co-sign or not, that is the question.
It can be tough to get approval for loans or credit cards for someone who doesn’t have a good credit history. However, businesses still approve such applicants if someone with good credit agrees to co-sign for them. If your loved ones ask you to co-sign and you agree to help, they will get most of the benefits. You, however, may face lawsuits, broken relationship, and burned up savings.
Now, we’re by no means advising you to leave a close friend or family member in a lurch if you have the means to help. I’ve personally co-signed a loan for a family member in dire need of help. In my case, the family member made their payments on time and no negative impact occurred for me. In fact, they raised their score enough to refinance the vehicle into their own name just a couple years after purchasing.
With that success story in mind, it’s not often the norm. More times than not, co-signing ends with someones credit in shambles, or worse, the co-signer is left with a huge debt that they are legally bound to repay. This guide will tell you a few reasons not to co-sign a loan, and how it can truly affect credit:
Well, should I co-sign? Here’s some things to think about.
You Can Get Sued:
If you are co-signing a loan, then you should remember that instead of suing the borrower, the lender can sue you. Granted, you didn’t take the money for yourself, but by co-signing you extended your good credit to someone else. So if you co-sign and the borrower is not making the payment, you might end up paying hefty fees coming out of a lawsuit.
You Will Be Responsible For Payments:
When you are co-signing a loan, you are accepting the responsibility for making the payments if the borrower defaults. So if the payments are delayed, the 3rd party collector will come to you for collection. Now you may go to your loved one to tell them to make the payments, but, if they fail to do so, you will end up stuck with the bill. It’s rare this extra bill fits into our already tight monthly budgets, thus causing further debt for the co-signer.
May Affect Your Relationship:
It is not just your credit or your finances that would suffer, your relationship with the borrower (who is definitely someone close as you have co-signed for them) will also be damaged. If the borrower is not making the payments, what would you do? Will you sit back and handle the lawsuit filed by the lender or make the payments by yourself? You could of course confront the borrower, or worse yet, sue them for not making the payments, and that’s a sticky situation when it comes to personal or family relationships.
The Co-Sign Credit Card Problem:
By co-signing you are also increasing your debt to income ratio which simply means an addition to your existing debt(s). Because of this, you may fall victim to what we call the ‘co-sign credit card problem’. This simply means that by increasing your debt, you may not be able to get approval for credit cards or loans. This is because lenders and creditors first look at your debt to income ratio and then decide if you are worthy of a loan or a credit card. So this means by co-signing, you may find yourself unable to enjoy the benefits of your own good credit, as your debt to income has risen to help the co-applicant.
Does Cosigning Affect Credit?
Yes! It does, and in a positive way if paid on time. Remember, both parties are now showing a new loan on your credit reports. BUT, since you are qualified for co-signing, your credit may not need much help anyway. And on the other hand, co-signing for someone is a much bigger risk to take than getting a few points of increase in your credit score. So the answer to ‘does cosigning affect credit’ is obviously yes but at a risk of increasing your debt, facing co-sign credit card problem, and getting a lawsuit if the borrower defaults.
Over to You:
If you are still thinking of co-signing for a friend or family member, it is suggested that you keep aside the monthly payments of the borrowed amount for 12 months. This way, if the borrower defaults, you will be able to make the payments without getting burdened financially.
It’s very difficult to see a family member or friend in need and not feel compelled to help in any way you can. But, it’s also important to think about your own future, and the potential negative impact this decision can cause. It’s always recommended to explore other options with your co-applicant before signing your name on the dotted line.