We all want to help out where we can. But do your homework first.
Congratulations! Your credit is looking good. You’ve got money in the bank, and you’ve been following a responsible budget for a while now. All this financial success is great for you, of course, but it can also open you up to some pretty interesting requests.
See, when your credit isn’t so hot, it can be difficult to gain access to traditional lines of credit and cash that are readily available to people with great credit, like you. If you want a new credit card, all you have to do is apply and voila! There it is! Want to take out a personal loan? The bank will bend over backward to give you one. Want to go back to school? FAFSA will literally throw money at you. OK, maybe not literally, but the point still stands: Things are a lot easier when you have a good credit score.
When you have bad credit, it’s not so simple. Any emergency can mean financial ruin, and when you have nowhere else to turn, predatory no credit check loans might seem like the only option. But here’s the thing, people with bad credit who get their friends and family with good credit to vouch for them can have a much easier time.
If you have good credit, don’t be surprised if someone you’re close to asks you to cosign for them on a loan, a credit card or a lease. Instead, you should ask yourself these five questions.
1. What exactly does cosigning mean?
When you cosign on something, it means that you are being asked to take on the other person’s debt if they are unable to pay it. According to the FTC, in order to cosign on a loan for someone, you must first sign a “cosigner’s notice,” which lays out the terms of the agreement:
You are being asked to guarantee this debt. Think carefully before you do. If the borrower does not pay the debt, you will have to. Be sure you can afford to pay if you have to, and that you want to accept this responsibility.
You may have to pay up to the full amount of the debt if the borrower does not pay. You may also have to pay late fees or collection costs, which increase this amount.
The creditor can collect this debt from you without first trying to collect from the borrower.* The creditor can use the same collection methods against you that can be used against the borrower, including suing you or garnishing your wages. If this debt is ever in default, that fact may become a part of your credit record.
This notice is not the contract that makes you liable for the debt.
*Depending on the laws in your state, this may not apply. If state law forbids a creditor from collecting from a co-signer without first trying to collect from the primary debtor, this sentence may be crossed out or omitted.
2. What (and who) is the loan for?
So you’ve been asked to cosign on something. Before you sign on the dotted line, it’s important you establish exactly what you’re helping this person to get. There’s a big difference between helping someone get a college education, helping to lease a brand new car, or helping someone get an apartment.
While it’s noble to want to help someone go to college, for example, you could be potentially signing on to hundreds of thousands of dollars worth of debt. What if the student in question drops out and can’t find a job? You’ll be on the hook for the full cost of their education. What if they’re irresponsible and miss payments? Your credit will take a hit.
You also need to consider who this person is to you. Are they your child? Your sister? Your friend from high school who randomly messaged you on Facebook? Remember, no matter how close you are to this person, you are not obligated to risk your good financial standing for them.
3. Why does this person need a cosigner?
This is an important point to consider before legally binding yourself to someone. Why, exactly, do they need you to cosign for them? Was their identity stolen by a scammer who racked up fake debt in their name? Are they a young teenager who doesn’t have ANY credit —good or bad—yet? Are they stuck in a debt spiral from predatory loans? Have they filed for bankruptcy? Been evicted because they couldn’t pay their rent?
Don’t be shy. This person is asking you to legally vouch for their debts, and you deserve to get a full and honest picture of their financial history before you agree to anything. If you know this person well, ask yourself whether you consider them to be responsible. Have you ever seen them fall behind on installment loan payments or on their rent? Or have you always known them to be good with money?
Ask them about their credit score, about their payment history. Make sure you know about their job history, and their current monthly income and expenses. This might be an uncomfortable conversation to have, but it’s necessary to completely understand this person’s finances before you risk yours to help them.
4. Can I afford to take on the entirety of this debt?
If the answer to this question is no, don’t cosign on anything. According to Forbes, four in ten people who cosign loans end up losing money as a result of this decision. 26% of them say it damaged their relationship with the person they were cosigning for, and 28% say they experienced a drop in their credit score.
In order to avoid something like this happening to you, take a good, hard look at your own finances before you make a decision. Ask yourself: can you afford an additional $300/month payment on a car you don’t have access to? Do you want to carry $50,000 in student loan debt for an education you didn’t get? Do you have the money to cover this person’s rent for an entire year?
While in a perfect world, you won’t have to shoulder any of this debt, you are legally agreeing to do so by co-signing for them. If your life or finances would be significantly damaged by having to take on the entire debt load yourself, you should think twice before cosigning. You don’t want to get stuck relying on expensive loans because a friend or relative let you down.
5. What are the risks for my cosigner?
Yes, you’re not the only one at risk in this arrangement. Particularly when it comes to student loans, the person who you’re cosigning for could get stuck with payments they can’t afford based entirely on your income—not theirs. Additionally, if you die or declare bankruptcy, the loan you cosigned on may be immediately placed into default.
“Borrowers report that some lenders demand immediate full repayment upon the death or bankruptcy of their loan co-signer, even when the loan is current and being paid on time. Borrowers also describe facing bureaucratic barriers to releasing co-signers from their loans, a commonly advertised benefit that could help avoid auto-defaults.”
If you are set on cosigning for someone, make sure both of you are thoroughly educated on the procedure for cosigner release, and on what would happen to the loan if something were to happen to you. Ask the lender these questions before you sign, or you could be putting both of your financial futures in grave danger.
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The information contained herein is provided for free and is to be used for educational and informational purposes only. We are not a credit repair organization as defined under federal or state law and we do not provide "credit repair" services or advice or assistance regarding "rebuilding" or "improving" your credit. Articles provided in connection with this blog are general in nature, provided for informational purposes only and are not a substitute for individualized professional advice. We make no representation that we will improve or attempt to improve your credit record, history, or rating through the use of the resources provided through the OppLoans blog.