Cosigning Loans: What You Need to Know

Cosigning can be a noble act, but it’s a big commitment as well. Here are some things to keep in mind when deciding whether or not to cosign a loan.

An uncle of mine recently asked my dad to cosign my cousin’s student loan. Without hesitation, he gave my uncle his social security number and agreed to help. My dad didn’t immediately think about how cosigning would affect him, not to mention the danger in sharing sensitive information.

Cosigning can be a noble act, but it’s a big commitment as well. Here are some things to keep in mind when deciding whether or not to cosign a loan.

What You Need to Know

Risk.

Lenders have systems in place to help determine how risky an applicant’s approval may be. Your credit report, credit score, income, debt, and assets are all taken into consideration, among other things. Lenders use this information to try to predict whether an applicant can manage an additional loan.

If you have too many obligations, inconsistent payment history, or no credit history, the chances of getting a denial are high. Know that by agreeing to cosign, you’re taking a risk. You may not encounter any problems but you should be cognizant.

Responsibility.

We hope for the best when cosigning. We trust the borrower will be responsible in making on-time payments and feel we won’t need to be involved after approval. Unfortunately, things don’t always go as planned.

If something goes wrong, you will be held accountable. You should be prepared to make the payments yourself if the borrower defaults. Failing to keep up with the loan may cause significant damage, which brings me to my next point.

Credit.

As with any other loan application, your credit will be pulled, an inquiry will appear on your credit report, and payment history on this new loan will be factored into your credit score. The loan will appear to be yours but you may or may not receive statements or have access to information on the account.

If payments aren’t made or are made late, there will be negative implications on your credit score and credit report. Be sure to have borrower show proof of payment each month to avoid unfavorable surprises.

Debt to Income Ratio.

After you’ve cosigned a loan, the amount of debt in your name increases. Suddenly, you have more debt while your income has remained the same. This will impact people in different ways but you should know that this may affect your future loan applications. More money appears to be tied up even though you may not be making the payment. Keep this in mind if you’re planning to apply for a loan in the near future.

Removal.

If there’s a turn for the worse and you decide you should be removed from the loan, you’ll likely find that it’s rather difficult – if not impossible. Most lenders will not remove a borrower from a loan unless the borrower qualifies on their own. Most often, the borrower will have to apply to refinance on their own. The existing loan would be paid off relieving you of any obligation, and a new loan would be created.

Feelings.

In most cases, people are co-signing for family or possibly even friends. It’s great to help others repair or establish credit but you shouldn’t let your feelings cloud your judgment. Only sign the dotted line if it’s something you’re able and willing to take on. If you are not in state where it is feasible, talk to the individual. While it may difficult to decline, it’s best to avoid a sticky situation down the road.