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Should I Cosign a Loan?

Posted on Wednesday, August 10, 2022
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by AMAC, D.J. Wilson
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To cosign a loan can help a family member or friend secure important transactions such as buying a car or house, securing a loan, or attending college. Cosigners are generally needed when a borrower’s credit score or income are insufficient to meet underwriting guidelines of a financial institution. While it is admirable to want to help someone by cosigning a loan, it is a big responsibility not to be taken lightly. Before jumping in to help someone, here are a few basic things to know:

  • When you cosign a loan, you pledge responsibility to make loan payments should the other party default. If the other party does not make payments, you must.
  • Cosigning a loan assures that someone with poor or unestablished credit history or low income can obtain a loan. 
  • Cosigning a loan will likely help the other party obtain better loan terms.
  • The account will appear on your credit report as well as on the borrower’s.
  • Know the financial risks and make sure all payments are made on time.
  • Should the other party fail to make timely payments, your credit score will suffer, likely lowering it and making it harder for you to obtain a loan.
  • A cosigner can be on the hook for late fees and collection costs, should they apply.
  • Consider the emotional components as well. Should problems with the arrangement occur, a cosigner’s relationship with the borrower may be at risk.
  • In some cases, a cosigner might have to pay all that’s owed immediately upon default.
  • A cosigner can be sued, have wages garnished, or face bankruptcy in certain circumstances.
  • Cosigners have no rights to the money even though they may be responsible for repayment.
  • In the event of an automobile loan, a cosigner does not gain possession of a car they cosigned for. The cosigner has no rights to the property.
  • The main borrower may suffer should their cosigner default or die, so having both parties understand terms is key.
  • Due to the high costs associated with college educations, parents often accept responsibility as a cosigner of their children’s student loans. Students should be encouraged to look for programs such as scholarships or grants that may lower college costs. Additionally, students should submit a FAFSA before applying for private student loans.
  • Alternatives to cosigning a loan for someone include lending a person money directly, though expect some risks in doing so.
  • In some cases, such as with a student loan, it may be beneficial to obtain a cosigner release after a specified number of payments are completed. This allows the removal of a cosigner once criteria are met.
  • People seeking someone to cosign can also shop around for loans with different lenders. They may also work to increase their income and build up strong credit so that they can gain access to future loans without the need for a cosigner.

The above points highlight some benefits and complications of being a cosigner of a loan. Though it’s admirable to seek to help family and friends by cosigning loans, it is a complicated matter that can put your own credit and financial wellbeing in jeopardy. Since people who want or need a cosigner cannot qualify for a loan by themselves, there is always a chance that they may not be able to make timely payments. In that case, the cosigner is 100% on the hook.

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