A friend, spouse, or colleague may ask you to co-sign a loan. Finding a co-signer with a better credit score will increase the possibility of qualifying for the loan. It may seem the right thing to help out, but it has some hidden financial risks.
A co-signer is someone who agrees to sign jointly with a primary borrower for a loan. The co-signer becomes legally responsible for the loan if the borrower defaults on payments. Most borrowers require co-signers since they cannot qualify for a loan by themselves. However, there are risks involved. Read on to find out about the risks of co-signing a loan.
You are Responsible for Paying the Loan
Co-signing a loan makes you liable to pay the entire loan if the borrower is unable to repay the loan. You become responsible for making payments just like the primary borrower. You are also liable for additional costs such as late payment penalties and interest rate costs.
The lender can take legal action against you if you default on the payment. Legal action taken against you damages your credit and reputation. It is, therefore, necessary to assess your financial situation before co-signing for a loan. Ensure that you can repay the loan if the borrower defaults. It will also help to conduct a background check on the borrower with Enformion.
It Can Ruin Your Credit
The details about the loan and repayment will appear on the borrower’s and the co-signer’s credit reports. Any negative issue with the loan such as defaults and late payments will also appear in your credit reports. The history of the loan cannot be erased from your credit reports.
The negative remarks from a co-signed loan have an immediate negative impact on your credit score. Lenders pay attention to the credit history before approving a loan. Black marks from a co-signed loan are enough for lenders to rule out your loan application.
It Affects the Ability to Get Yourself a Loan
Co-signing a loan increases your debt-to-income ratio. Even though the debt-to-income ratio does not influence your credit score, it is a crucial factor evaluated by lenders before approving a loan. A high debt-to-income ratio reduces your chances of getting a loan.
An increase in your debt-to-income ratio has long-term effects on your credit. The debt’s history remains on your credit reports even if the borrower made the repayments on time. It is recommendable to check your credit report regularly to be up to date with your debt-to-income ratio.
You can be Sued by the Lender
If the worst happens and the borrower cannot repay the loan, you are held legally responsible. The lender can sue you if they do not receive payments from the borrower. For legal action to be taken, the lender may have not received a series of payments.
When the borrower defaults, you are supposed to make the payments. If you fail to make the payments, the loan goes into collection or foreclosure. At this point, the lender can sue you for the payments.
You Risk Your Relationship
Saying no to co-signing on a loan may cause temporary tension between you and your friends, spouse, or family. Naturally, your friends, spouse, or family will be disappointed. However, agreeing to co-sign may cause more frictions.
Problems start when the borrower fails to make payments. If you are forced to repay the loan, you are likely to demand reimbursement from the borrower. You might even decide to take legal action against the borrower. The situation will put your relationship at risk.
It is Not Easy to Get Yourself Off the Hook
It is not easy to remove yourself as the co-signer when things go wrong. Once you co-sign for a loan, you are responsible for the entire loan if the borrower defaults. No process can save you from repaying the loan.
Eventually, you will have to refinance the loan. You assume the liability of the loan unless the borrower can make payments on their own. Therefore, you need to be careful before agreeing to co-sign a loan. In most cases, filing for bankruptcy may be your only viable solution.
The Bottom Line
Co-signing a loan exposes you to several risks. By co-signing for a loan, you put your income, credit, and relationships on the line. Before co-signing for a loan, take time to evaluate the ability of the primary borrower to repay the loan. PeopleFinders can help you find out the details about the borrower before co-signing. Ensure you join PeopleFinders today to get more insight.
