The Hidden Risks of Co-Signing Loans: Protect Your Credit Score

Co-Signing Loans - Risky Business

What are the risks of co-signing a loan?

There may come a time in your life when you are asked to co-sign for a loan or credit card. If this is the case, there are several things to consider before making a final decision. Technically, you are putting yourself at risk of damaging your own credit in the event that the loan goes unpaid.

The vast majority of individuals, seeking a co-signer fully intend to make timely payments. Unfortunately, good intentions are sometimes interrupted by unforeseen problems and situations.

Your Credit Rating

Typically, when you co-sign a loan it makes it more difficult to get credit yourself.

This is because lenders take into consideration the cosigned loan, when figuring out your debt ratio.

Depending on the size of the loan, it could very well put you over your limit. If you are asked to co-sign a loan with an open line of credit, consider it very carefully before making any decision.

No Control

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As the cosigner you will have no way of controlling the spending habits of the individual who will be making the purchases.

They could easily tell you they will only be spending $1000 when in reality they spend 10 times that much.

There are certain lenders who will agree to initially freezing a line of credit, if it is requested.

In this case scenario, there is less risk involved. In many cases cosigners are not notified until the loan actually defaults.

This obviously causes a problem, because it may be too late to rectify the situation.

It is wise to ask the lender if you will receive a duplicate statement or be given the ability to check payment status by phone.

If the answer is no, think twice before signing on the dotted line.

Before you Commit

Unfortunately, individuals who require a cosigner either have no credit or bad credit.

Although those with no credit history are probably more apt to make timely payments, there is still no way to be sure.

Individuals with bad credit may be prone to the same habits that resulted in a bad credit rating, in the first place.

When it comes right down to it, cosigning a loan is risky business, no matter how close you are to the borrower.

Before you commit yourself it is important to ask yourself if you can pay when your friend can't.

Published: Monday, 23rd Aug 2021
Author: 91

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Knowledgebase

Mortgagor:
A person who offers to assign an asset as security (e.g. real estate) under a mortgage loan contract. The lender (mortgagee) holds the legal ownership of the security until the loan is repaid and the mortgage is discharged.