Would you contemplate cosigning for a loan? You need to be careful as co-signing a loan comes with several risks. According to a survey by creditcards.com, 38 percent of cosigners have to pay off some or all of the credit bills or loans because the primary borrower default. Basically, this shows that there can be dire consequences if the main borrower misses a payment. Here, you will understand the risk involved in co-signing and why you should avoid co-signing for a loan at all costs.
Why is Cosigning a Loan Risky?
Cosigning a loan is a risky proposition because it means you are practically bearing all of the legal responsibilities and obligations for the account. Basically, this means that the loan will reflect on your credit report. Hence, if the main borrower defaults in any payment on the loan, it will appear in your credit report and the lender may require you to pay for it.
It is important to note that before cosigning for the loan, the lender or “creditor” must clearly state out your responsibilities in a cosigner’s notice.
Top 5 Reasons Why You Should Avoid Co-signing For A Loan
Here are five major reasons why you should avoid co-signing for a loan:
1. You do not have the money to pay if the main borrower defaults.
Imagine that your loved one defaults on the loan and the lender requires you to pay back the loan. Do you have the money to do that? Moreover, what impact will cosigning a loan have on your personal finances? If you can’t pay back the loan, you should think twice before cosigning on the loan. Remember that if you don’t pay off the loan, the lender can sue you, and this damages your credit rating.
2. You are disorganized financially
If you are already having trouble getting your finances together, it will be burdensome to help someone else out with theirs. You can’t just blindly trust that the main borrower will not default in paying back the loans
Also, check to ensure that the borrower makes every payment for each month. You can place a direct call to the lender every month to verify. In fact, before you cosign a loan, ask the creditor to inform you in writing if the borrower defaults or changes the terms of the loan.
3. You want to obtain other loans.
Any loan you cosign automatically becomes your financial obligation, even if you are only trying to help out a family member or close friend.
Hence, other lenders might feel reluctant to give you loans since you are already indebted to a loan. So if you are considering taking out a loan for yourself, it is better not to cosign.
4. It will ruin your relationship.
What impact will co-signing the loan have on your relationship with the main borrower? Will you forgive them easily if they skip a payment or default? If cosigning a loan with the main borrower might damage your relationship, it is better to save yourself from the impending trouble.
5. You don’t trust the borrower.
How much trust do you have for the person asking you to cosign for a loan? Do you think he or she can make timely payments and without default? Is it possible that the borrower can be in a position where he or she can’t pay the loan off? If you don’t trust the borrower, it is better to not cosign the loan.
Co-signing a loan is a huge decision that can ultimately affect your finances. Hence, you must be very careful before you make that kind of financial commitment. Although there are several reasons why you should avoid co-signing for a loan, this should not deter you from co-signing for a person you trust. Just ensure that you collect all copies of the important documents pertaining to the loan. Basically, these documents can protect you from bearing the financial burden fully if the borrower defaults.
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