There are a thousand odd situations where you might be faced with a tough financial bind. You might need a loan to get a new car, pay off debts or simply send your children to college. What if your child needs a credit card or your wife needs to apply for a debt consolidation loan? Poor credit score might also prevent one of your loved ones to open a much needed new line of credit. In such situations, the only option you might have of helping them is by co-signing for the loan.
Although co-signing for a loan seems like an exclusively helpful gesture to help people out in tough times, you should be fully aware of the ramifications. Here is a brief overview of what you need to consider when you co-sign for a loan.
You might see your credit score drop - As far as the credit reporting agencies are concerned, they will consider you to be the borrower even if you are nothing more than the co-signer. The loan will appear on the actual borrower's credit report as well as yours. You should consider the fact that in case the borrower fails to make timely payments against the loan you co-signed for, it will negatively affect your credit score.
You might have a hard time finding new credit - You might need to open a new line of credit for yourself or you might be planning on refinancing your mortgage in the near future. From the point of view of the lender, the loan you have co-signed for will seem like your own financial liability. Moreover, as per your credit report, the lender will infer that your debt to income ratio is not very favorable. Therefore, co-signing for a loan might affect your chances of getting a loan in the future or attract a very high rate of interest.
You might have to pay the debt - A recent study by the Federal Trade Commission showed that 75 percent of all co-signed loans which have gone into default end up being paid by the co-signor. Co-signing for a loan also attracts the potential danger of being targeted or sued by the creditor. Although co-signing for a loan seems like a noble thing to do, you need to remember that you are assuming as much financial liability as the actual borrower.
You might get sued - Co-signing for a loan not only means that you are making yourself liable for paying off the loan, you are also taking the responsibility of paying late fees and unpaid accrued interest. If the actual borrower fails to make timely payments, the debt might be handed over to a collection agency. Things can always get worse since the collection agency or the original creditor might choose to sue you. The court might then allow the creditor to garnish your wages and put a lien on your assets.
There are quite a number of potential hazards of co-signing for a loan but if you have to help somebody out in a desperate situation, there are ways to limit your liability as the co-signor. According to the FTC, the easiest way to limit your financial liability is to have a clause in the loan contract which clearly states that you are only responsible for the principal amount and you should be notified immediately in case the borrower misses a payment. You should be well aware of your rights and responsibilities before you opt for co-signing on a loan.