Have you ever cosigned for a family member or a friend? Have you been asked to cosign, but you aren’t sure what that means for you and for your financial future? On paper, cosigning for a friend sounds really nice – helpful even. Maybe your college buddy needs help getting into a car or your daughter just needs a little help with her first auto loan. Sadly, there are usually far more reasons not to cosign than there are to go ahead and help out.
What is a Cosigner?
As a cosigner, you apply for a loan with someone else and legally agree to pay off the debt associated with the loan if they do not make the payments. The most common reason someone will need a cosigner is because they can’t get approved on their own due to either a low credit score, a lack of income, or existing debt. Cosigners are often friends or family members of the borrower who has a steady income and a solid credit score. Lenders are also more likely to offer favorable terms when a loan has a cosigner (i.e., lower fees or lower interest rates).
Why Do Lenders Require Cosigners?
While agreeing to cosigning feels a lot like helping out someone you love or respect, it also comes with a lot of risks. The other person’s actions could negatively affect you. If you step back and think about it, if the lender thought the borrower was capable or likely to follow through on the terms of the loan and make their payments, they wouldn’t require them to have a cosigner. Lenders make their decisions based on decades of data to pinpoint the likelihood that a borrower will pay back a loan. If they aren’t willing to bet on the borrower, you probably shouldn’t either.
Before You Decide to Cosign, Consider This:
Being a Cosigner is High Risk and Low Reward – Cosigning means all the responsibility to pay for a car or a home without actually living in the house or driving the car. Cosigners may see a slight benefit to the credit score if payments are made on time, but if the lender recognized them as an appropriate cosigner, they probably don’t need the slight improvement to their score the cosigned loan could create. Cosigners get all the risk if the loan is not repaid, but very little reward.
Lenders Go After Cosigners First: If problems arise and the loan is not paid as agreed, lenders tend to go after the cosigner first for payment. You may find yourself facing a lawsuit for nonpayment.
Cosigning Puts Relationships at Risk: Cosigning puts a strain on otherwise healthy relationships. The cosigner may feel it necessary to pressure the borrower to make their payments on time, the borrower may feel indebted to the cosigner, if the borrower doesn’t make payments on time, the cosigner could hold them responsible for the damage to their credit score, etc.
You May Be Unable to Obtain a Loan of Your Own: By agreeing to be a cosigner, you may find yourself unable to get approved for a loan of your own when the time comes that you want to make a purchase of your own.
If you are considering cosigning on a debt, make sure to consider the potential consequences. If you need to discuss how a cosigned loan is handled during a bankruptcy or if you need to file bankruptcy, please don’t hesitate to get in touch. Most bankruptcy offices in the Chattanooga area don’t have a single Consumer Bankruptcy Specialist on staff. Our office is the only one in Chattanooga with two. You are in good hands with Kenneth C. Rannick P.C.