In short, a cosigner is someone who has decent credit, offering to take over a loan for you if you fail to make payments. They’re the banks backup in case they don’t get paid.
But before you beg your parents to cosign a loan, there are some things you (and your cosigner) should be aware of. Cosigning shouldn’t be something that’s done lightly. It can have a lot of negative consequences.
Why do people need cosigners?
As I mentioned above, cosigners are there to help people who have no credit or poor credit. While there are many ways to build credit, when you need a loan and you’ve got limited credit, a cosigner is your best bet.
Typically, cosigners are used by teens or young adults who are taking out college loans, or signing a lease on their first apartment.
But cosigners are also used for people that need a loan on a car or even those who want to take out a credit card. Bank of America and Wells Fargo are two of the few who allow cosigners on credit cards.
What happens if the loan borrower fails to make payments?
The most important thing for a potential co-signer to know is that you will be responsible for payments on the loan if the person you sign for doesn’t pay.
So if you don’t have the means to pay, this will negatively affect your credit score. Your debt-to-income ratio will also increase. This is exactly what it sounds like—the percentage of your debt in relation to your income. This can negatively affect your credit score as well.
Finally, you’ll be included on the call and mailing lists if the debt goes to a collection agency. If worse comes to worse, the lender or debt collector can file a lawsuit against you for any unpaid part of the debt, even without suing the person you cosigned for.
What to do if the person you cosigned for stops making payments
None of the options you have are ideal, but unless you talk with the original borrower and convince them to somehow catch up on payments, you’re limited as to what you can do.
Pay the debt
This is the most obvious line of action. You shouldn’t cosign a loan unless you have the means the pay the debt the borrower is taking on.
But, plenty of people are cosigners who can’t get caught up on payments if the borrower has continuously missed them.
Consolidate or refinance the loan
Since the original borrower likely won’t have the credit to consolidate or refinance the loan themselves, you can do it for them.
This will give you (or the borrower) a lower, more affordable monthly payment.
Know when to say no to cosigning
While helping out your kid with college loans is the only way they’ll get them most of the time, if you’re in other situations where someone asks you to cosign a loan, it’s important to know when you should say no.
The risks of cosigning outweigh the benefits, no matter how honorable. Saying no to someone you’re close with may put a strain on your relationship for a while, but that’s nothing compared to what massive debt and a ruined credit history will do to a relationship.
Being a cosigner is ultimately a personal decision, but it’s important to know the very real risks. You’ll be entirely responsible for any missed payments and you’re putting your credit history at risk.
- Considering A Cosigner On Student Loans? Here’s What You Should Know
- How To Get An Apartment When You Have No Credit History