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Co-Signing A Loan: Risks & Benefits

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Is Co-Signing A Loan Risky

When someone asks you to cosign on a loan, you should understand what that really means and what kinds of responsibilities it entails. You should also understand the risks. Cosigning a loan implies that you are vouching for the primary borrower. You are using your credit to help the primary borrower either qualify for the loan, qualify for a better interest rate, or access a larger sum of money. This is different from being a bo-borrower. As a co-borrower, you would also have access to the funds being requested, but as a co-signer, you would not. You simply are using your name and your credit to help the primary borrower in some way. The main responsibility of the co-signer is to be held reliable for the loan if the primary borrower is unable to make their payments.

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Learn More About Co-Signing A Loan: Risks & Benefits

Co-sign is the act of signing onto a loan in conjunction with another person who you promise you will help out financially if something happens where they are unable to repay the loan and ultimately you are sharing the responsibility of the loan 50/50 although you may have no access to the benefits of the loan. All risk and no reward.

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What does cosigning a loan mean?

When someone asks you to cosign on a loan, you should understand what that really means and what kinds of responsibilities it entails. You should also understand the risks. Cosigning a loan implies that you are vouching for the primary borrower. You are using your credit to help the primary borrower either qualify for the loan, qualify for a better interest rate, or access a larger sum of money. This is different from being a bo-borrower. As a co-borrower, you would also have access to the funds being requested, but as a co-signer, you would not. You simply are using your name and your credit to help the primary borrower in some way. The main responsibility of the co-signer is to be held reliable for the loan if the primary borrower is unable to make their payments. When the lender has this kind of reassurance, it allows them to maybe extend a loan, or a larger loan, to someone they might not have if it was only the primary borrower alone applying. When the primary borrower applies for the loan as you as their co-signer, the loan will also be put on your credit report affecting the total amount of debt that you currently have. If on-time payments are made, it can improve your credit, if late payments are made it can hurt your credit. In the eyes of the credit reporting agencies, the loan, its details, and its payment history is equally yours as it is the primary borrowers.

What does co-sign mean?

Co-sign is the act of signing onto a loan in conjunction with another person who you promise you will help out financially if something happens where they are unable to repay the loan and ultimately you are sharing the responsibility of the loan 50/50 although you may have no access to the benefits of the loan. All risk and no reward.

Does being a cosigner affect your credit?

Yes, being a cosigner has both the potential to harm and help your credit. It all really depends on how the primary borrower manages the loan. Are they making late payments or are they making payments on time? This is one of the biggest ways that being a cosigner on a loan can affect your credit score. If the primary borrower begins to make late payments or even miss payments, the lender is under no obligation to contact the co-signer. It is up to the primary borrower to inform the co-signer that they are in danger of missing a payment or that they have already missed payments. Because of this, it could be a couple of months before you are even aware that the payments have been being submitted late or that the payments have been missed. This is not always the case as some lenders may give you a courtesy call, however, if you are going to be a co-signer, you must make sure that you keep an open line of communication with the primary borrower at all times. Also, you should be prepared to be able to take on that monthly payment as well because if you are unable to make the monthly payment yourself, then both you and the primary borrower are in trouble. Additionally, if for some reason the loan goes into default, even though you were the co-signer, that could bring down your credit score anywhere between 90 and 110-points and stay on your credit report for up to 7-years.
But it is not all negative. If the primary borrower on the other hand continues to make on-time payments and they pay the loan off in full, then not only may you have that additional 100% successful payment history on your credit report to boost your credit score, the successful completion of the loan may show future lenders that you are able to manage credit well even though you are the co-signer.
Last, there are a few things that happen when the new loan hits your credit report. First, you will see a hard inquiry on your credit report. Second, your overall credit usage will go up. Last, your credit mix may be positively affected.

What does a co-signer do?

Honestly, a co-signer does not do anything except volunteer their name and credit history to help out the primary borrower. If the primary borrower makes all the payments on time and the loan is paid, then nothing else is done. However, it is if things start to go south that then it is the co-signer who is held liable for the loan.

Is the co-signer responsible for the loan?

Yes, the co-signer is equally as responsible for the loan although ideally, it should be the primary borrower who makes all the payments. If the primary borrower is unable to make the monthly payments, then the co-signer will need to step in and make the payments or risk damage to their credit score.

What are the risks of co-signing a loan?

The main risks of being a co-signer include damaging your credit profile and being obligated to take on the monthly payments for a loan that you were not the beneficiary of. When you are acting as a co-signer, you are essentially vouching for the primary borrower and putting trust in the fact that they will make their payments on time.

Can you be removed as a cosigner on a loan?

Yes, you can be removed as a cosigner from a loan, however, it is up to the individual lender to dictate the terms of the release. Typically, a lender should have a process for the co-signer release. Most lenders will not release a co-signer until some proof of prolonged on-time payments has been made. Also, the lender may reserve the right to renegotiate the terms of the loan with the primary borrower once the co-signer has been released.

What happens if you cosign a loan and the other person doesn't pay?

If you co-sign a loan and the other person starts falling behind on payments, you will need to step up and start making payments on their behalf or risk damaging your own credit score. If the loan is in danger of default, you will have to take over the loan or risk a default on your credit report. A default on your credit report can plummet your credit score at least 90 or even 110-points and it can stay on your credit report for up to 7-years.

What credit score does a cosigner need?

Typically, when you ask someone to be your co-signer, you are doing so in an effort to improve the way you look in the eyes of a lender. Whether you are simply trying to qualify for a small short-term loan, trying to secure a lower interest rate for your car loan, or you need a larger amount of money for your home improvement project, you most likely would want someone with good to excellent credit. The better their credit score is, the more favorable your results may be. Also, lenders will want to see someone with good credit who is trustworthy themselves if they are going to act as someone's co-signer. Because of this, most lenders are going to want to see a minimum credit score of 670, however, that is the minimum. Ideally, you should have a cosigner who has a credit score in the mid-700s.

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