What to Know Before Co-Signing a Loan
Sometimes when someone is looking to secure their first car loan, they may look into finding a family member or close friend to cosign the loan to increase their chances of qualifying for one. There are several reasons why a person would be looking for a cosigner, like high debt, bad credit or not enough credit history. A cosigner is an individual who legally agrees to repay the borrow's debt, should they default on the loan. The individual will typically have a good credit score and is used to help a borrow secure a loan they may not have been able to qualify for otherwise. If asked to cosign a loan, it is important to be aware of the benefits and risks prior to accepting and signing any paperwork.
Once you have signed on as a cosigner, you cannot opt out whenever you want. If you run into tough times financially, you can't remove yourself from the loan. There is an option to make an agreement with the borrow that they'll refinance the loan in their name only once their credit is strong enough to qualify for a loan on their own.
As a cosigner, you can lower the borrower's interest rate, which can make it cheaper for them to pay off their debt. Since the debt is less risky to the bank, they will likely be offered a lower interest rate, lowering their monthly payments.
As a cosigner, your credit can be affected. If the borrower fails to pay the loan per the agreement, it could actually hurt your own credit score. Any late or missed payments will show up on your own credit report and will subsequently affected your credit score. Also, the loan payment will show up on your own credit report, meaning that payment will be included in your own debt total should you attempt to secure your own financing down the road.
As a cosigner, it is important to still budget accordingly, as you will be on the hook if the borrower defaults. These monthly payments should be treated as actual payments when you budget. It is good to be prepared for any payments should things go south for the borrower, otherwise you could suddenly be on the hook for payments with no funds available.
A huge benefit of cosigning a loan is that you'll give someone close to you the opportunity to obtain a car loan that they wouldn't have been able to secure otherwise. This alone can make cosigning worth it even with the risks associated with it.
