If your loved one has had a delinquent credit history that’s been riddled with late or missed payments, they may face trouble in qualifying for a loan or Credit Card and ask you to co-sign for them. While banks prefer not to approve loan applications coming from these kinds of applicants, these applications can still beat the odds if the applicant can get someone with a good credit history to co-sign with them. If a loved one is looking to get out of a financial mess by taking out a loan and requests your help in getting one by co-signing it, here are a few things you need to keep in mind before you sign the dotted line:
Your Loved One Needs A Co-Signer Because They Don’t Qualify For A Loan Alone:
There’s a clear reason why your loved one needs you to co-sign a loan with them – they’re not creditworthy or at least, the banks don’t deem them to be so. Your loved one’s credit history or the lack thereof could be the reason why the lender is refusing to approve a loan for them and has requested for a co-signer. After reviewing their credit report, banks take a call on whether they would like to extend credit to someone or not. If the bank needs a co-signer, it is likely that they think your loved one will not be able to repay the loan on his own.
You Won’t Benefit From The Loan:
When you co-sign a loan, your loved one would actually be benefitting from the loan – they would be living in the house, driving the car etc. You won’t have the loan amount at your disposal or be able to make use of it. If the repayments on the loan are done on time, having this loan on your account may boost your Credit Score. But your Credit Score probably doesn’t need much attention if you can qualify as a co-signer. So, it’s not worth the risk.
Payments On The Co-Signed Account Will Affect You:
When you co-sign, you’re just as responsible for the repayments as if it were yours alone. You may not have access to the loan amount and will not be able to use it to fund your purchases, but if your loved one is late on payments, these will show up in your credit report too. The late payments will affect your Credit Score and impact your ability to get approved for loans. In fact, it may be months before your credit reporting agency notifies you of these delinquencies for you to intervene and salvage your credit history.
Your Level Of Debt Increases:
As mentioned earlier, the loan that you co-signed for will appear as debt on your credit history too and will affect your loan-to-income ratio. Thus, when a bank reviews your application for a loan or Credit Card, they would be taking this debt too into consideration and then determine your worthiness to qualify for additional loans. If the co-signed loan makes your debt-to-income ratio too high, this might hinder your chances of being approved for a loan or Credit Card.
You’re Responsible For Repayment If Your Loved One Defaults On The Loan:
When you co-sign a loan, you’re taking on the responsibility of making repayments if your loved one misses out on or fails to make any repayments. In fact, your loved one may still be able to get off the hook by claiming bankruptcy, but the lender will come after you for repayment of this loan. In the event that your loved one is let off the hook, the sole responsibility for repaying the debt will squarely fall on your shoulders and you may even be sued for the debt and have a negative entry in your credit report. It may take you years to get a negative entry removed from your credit report.
How To Get Out Of A Co-Signed Loan:
Getting out of a co-signed loan is more difficult than you think. Once you’ve co-signed a loan, your name would be attached to it until the loan is paid off. If your loved one transfers this loan to his own name, you might still be able to get off the hook but for that, they would have to qualify for the loan alone.
In fact, one thing to ponder over is what ramifications this loan would have not just on your credit history but even your relationship with your loved one. If your loved one fails or misses payments, your relationship with your loved one is bound to suffer. Conversely, if your relationship sours with your loved one before the loan is paid off, you would have to shoulder the responsibility of paying off the loan entirely by yourself if your loved one fails to.
Before you decide to co-sign, remember to assess and weigh in on the risks that your credit profile would become vulnerable to.
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