What to Consider Before Co-signing a Loan for Someone Else?

Getting approved for a loan can be challenging for some people. Such is especially true for those who have a poor credit rating or those without a stable income. In this case, most would resort into getting a co-signer, which lowers the risk on the part of the lender.

If someone approaches you to co-sign a loan for them, don’t immediately give your sweet yes. Instead, take the time to evaluate what it would mean for you. Read on and we’ll share the most important considerations.

1.   It Affects Personal Relationships

Co-signing a loan means you’re entering a shared responsibility. The lender can run after you when the borrower misses or delays a payment. This is where things can start going south. What was once a happy personal relationship can end up being rocky.

Some children may hide the true status of their loan payments, and their parents might end up shocked after knowing that they’ll be the one to pay the amount owed. The same thing can happen between couples. It might even lead to divorce or legal separation because of the loss of trust. So, before being a co-signer, know that your personal relationship is on the line.

2.   Your Credit Score Can Suffer

The loan you will co-sign will become a part of your credit history. Hence, it can impact your credit score. It’s not a problem if the payments are timely. However, when there is a delay or default, your credit rating will suffer. Even if you’re not primarily responsible for the payments, the actions of the borrower will have implications in your credit standing.

Before you co-sign a loan, assess your personal credit. If you think you’ll need to apply for a loan soon, you might want to give co-signing a second thought. The burden could shift to you, making it difficult to qualify for a loan.

3.   You Must Gather Relevant Information and Documents

Agreeing to be a co-signer for loan means you should be ready to put in the necessary work. It’s not as easy as affixing your signature in the loan document. The requirements can vary from lender to lender, but gathering the documents can be challenging, especially if you have a busy schedule.

You’ll need to submit a copy of your credit report, since your rating is a crucial factor in the approval of the loan. Income documents are also necessary, which can help lenders assess your capacity to pay in case the borrower defaults. The lender can also request other proof of financial capacity.

4.   Know Your Rights

Being familiar with co-signer rights will help you manage your expectations. You’ll know what you’re entitled to and what you aren’t.

Among others, one thing you should know is you won’t have access to the asset that comes with the loan. For instance, when co-signing a home loan, your name won’t appear on the deed. Meanwhile, if it’s a personal loan, you’ll have no access to the funds.

In addition, you must know that you can be removed from the loan. This is known as a co-signer release, which can happen after having several on-time payments. It can vary depending on the lender. However, note that only the borrower can request your removal. Aside from such, another way by which the loan can end early is by settling the amount owed in advance once the borrower is in a better financial standing. The specifics can vary from lender to lender.

5.   The Risk of Losing Personal Property

Depending on the lender, you might need to submit collateral for the loan as the co-signer. It can be your house, car, or any other property that the lender can seize in case of a default. Hence, you risk losing the collateral.

To minimize the risks, it would be best to ask for a loan that does not require collateral. Getting approved for such can be more challenging, but at least, you’re not putting your property at risk of being seized.

6.   Request a Monthly Statement

In most cases, only the borrower receives a monthly statement. However, as the co-signer, you can request it from the lender. This way, you’ll stay on top of things and will know if there are problems with the payments.

If there are missed or delayed payments as reflected in the statements, act accordingly. Talk to the person you co-signed for and help him or her settle the debt. This will prevent things from escalating and affecting your credit reports.

Final Thoughts

You might want to help a family or friend by co-signing a loan. While you can do so as you wish, you must be aware of the repercussions. Take note of the things mentioned above and be fully aware of what you’re getting into.