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Things you should consider before cosigning a loan

Things you should consider before cosigning a loan

If a family member or close friend is looking to secure their first car loan, they may be interested in finding someone to cosign the loan to increase their chances of qualifying for one.

If you’ve been asked to cosign a loan, you should be aware of the benefits and risks priors to signing any paperwork.

What is a cosigner?

A cosigner is an individual who legally agrees to repay the borrower’s debt should they default on the loan.  This individual typically has a good credit score and is used to help a borrower secure a loan they may not have been able to qualify for otherwise.

You can’t opt out freely

Don’t assume you’ll be able to remove yourself as cosigner whenever you feel like it. If you run into tough times financially, you can’t simply opt out of the loan.  You could make an agreement with the cosigner that they’ll refinance the loan in their name only once their credit is strong enough to qualify for a loan on their own.

You can lower their interest rate

Not only can you help someone secure a loan by agreeing to cosign, but you can also make it cheaper for them to pay off their debt.  Since the debt is less risky, they will likely be offered a lower interest rate, making their monthly payments less expensive.

You can hurt your own credit

If the borrower fails to pay the loan per the agreement, it could actually hurt your own credit score. Any late or missed payments will show up on your own credit report and will subsequently affect your credit score.

Also note that the loan payment will also show up on your credit report.  This means that payment will be included in your own debt total should you attempt to secure your own financing down the road.

Budget accordingly

Since you’ll be on the hook if the borrower defaults, you should treat the monthly payments as actual payments when you budget. In an ideal world, you’ll never have to worry about these payments, but it’s good to plan for these unexpected expenses should things go south for the borrower.

Otherwise, you could suddenly be on the hook for a series of payments and don’t have the funds available to pay it off yourself.

You help out someone in need

The most important benefit to cosigning a loan is that you’ll give someone close to you the opportunity to obtain a car loan that they wouldn’t have been able to secure otherwise due to high debt, bad credit, or simply not enough credit history.

This alone can make cosigning worth it even with the risks associated with it.