Deciding Whether To Cosign
Being a cosigner is a very serious matter and one that should not be taken lightly. Many people just agree to cosign a loan without thinking about what it really means and the potential consequences. If you have been asked to be a cosigner, you must educate yourself before agreeing.
Who Needs A Cosigner?
When applying for a loan, an applicant will be judged by a lender on a number of factors. The lender will look, among other things, at the amount of the loan, the income of the borrower and their credit rating.
If the borrowers credit is not sufficient, adding a cosigner to the loan can help them get approved. It is a way to piggyback off of the good credit and credit experience of another person. It gives the lender extra security and can make a risky loan a much more secure one.
Who Would Use A Cosigner?
There are a lot of people who could use a cosigner. Most commonly, those with little to no credit turn to cosigners. This could be a recent college graduate looking for their first apartment or it could be someone looking to get their credit established with a car loan.
Those with bad credit can also use a cosigner to help get financing. If they have a bad track record, a cosigner can give the lender the security that they need to approve a loan. Of course, for a cosigner, getting involved with someone with bad credit is far riskier than dealing with someone with no history.
The Responsibility Of A Cosigner
When you cosign a loan, you are doing more than just helping the borrower get approved. You are personally guaranteeing the loan. Many people fail to put it all together but essentially, if the primary borrower fails to pay, the lender can come after you. You become responsible for the debt.
What this means is that they can attempt to collect the money from you just as if you were the primary borrower. They can send you collection letters, harass you and even take you to court to collect the debt.
Deciding Whether To Cosign
If you are on the fence about whether or not to cosign a loan, you should usually trust your gut. If you are uneasy, there is a reason for that and you should not feel guilted into doing something that you are not comfortable with. Cosigning, with the exception of for your child’s student loans, is rarely a good idea.
If you have been asked to cosign from someone with bad credit, you should take particular care. The person has already proven that they can not be responsible with credit and the chances of them sticking you with debt or ruining your credit are much higher. Sure, everyone needs a second chance but with credit, it is a better learning experience to have to build up one’s own credit from scratch.
Life As A Cosigner
If you have decided to become a cosigner, you will potentially have to deal with your decision for many years. Here are some things that you should be prepared to do.
Make Arrangements With The Borrower
You should both go into this with a clear understanding of what is expected.
If it is a long term commitment, do you expect the borrower to carry the loan to term or get it refinanced? In many cases, after 6 to 12 months, they may be able to refinance the obligation which could remove your name from the contract. Before agreeing to cosign, have the borrower agree to attempt to refinance the debt after a set period.
In addition, if the loan is for a long term or high dollar amount, like a college loan, you should seek some additional security. What would happen if, worst case scenario, the borrower died? You would be responsible for the loan, lenders are not emotional. It would be a good idea to therefore have the borrower take out a small life insurance policy with you listed as the beneficiary. The cost would be minimal but the benefits in security to you would be substantial.
Be Prepared To Take On The Debt
If the primary borrower defaults, the lender will turn to you. There is no getting out of it, so you had better be prepared for the worst. If they defaulted on a 5000 dollar debt, you now owe 5000 dollars.
If you have been contacted by a lender because you have become obligated, the best thing to do is work with the lender. They do not want to send you to collections any more than you want to start receiving collection calls. All that would do would complicate the process and add additional expenses to the debt.
If you can not afford the debt, make arrangements with the lender to restructure the debt or you can attempt to refinance it yourself.
Wrapping Up
Cosigning is far more of a big deal than people believe. Sure, if you have kids, you will almost always need to cosign something for them, but that is about the only good time to cosign.
In almost every other situation there is absolutely nothing in it for you. You will not get a boost to your credit if the loan is paid off, you only stand to lose.You open yourself up to debt and damage to your own credit profile.
