Perhaps you have a friend or know someone who has asked you to co-sign for a loan. Or maybe you’ve heard from your friend or acquaintance stories about a co-signing situation going terribly wrong. I’m not saying co-signing a loan for someone always goes badly, it just has the potential. Before you co-sign on a loan, understand what you’re doing and the risks involved of doing so. Co-signing on a loan means you are legally obligated for the loan and its payments. If the initial borrower defaults or decides not to make payments for any reason, you as the co-signer are then obligated to pay.
If a friend or family member is coming to you in need of a co-signer, this should be a red flag because it means they were not able to get approved for the loan on their own. Often lenders require a co-signer on a loan when the prospective borrower has insufficient income to afford the loan payments, does not have a sufficient credit history, or has a history of late or missing payments.
If you decide to move forward and co-sign on the loan, understand the loan will now show up on your credit report and will affect your credit score. If the initial borrower is late or misses a payment, this will negatively affect your credit score too because the loan shows in your credit history as your own.
Before co-signing on a loan for anyone, make sure you are in the appropriate financial situation to take on the debt payments if the original borrower can’t make the payments.
- Content Written by Elizabeth Braden, Worley Erhart-Graves Financial Advisors