Has someone asked you to help them gain approval on a loan for college, an automobile, a home, or anything else? If so, you probably had an initial urge to say yes. But there are plenty of reasons to say no, especially if you aren’t sure about the person’s ability to repay the debt. What happens if you cosign, and the loan goes into default or if the borrower racks up several late payment notations in the official record? It’s essential for potential cosigners to know what’s what with the process. Consider the following points before saying you’ll do it.
What Does It Mean?
Cosigners are equally liable on any loan to which their name is added as a secondary recourse for repayment. If payments are late, lenders will contact the main borrower first and the cosigning party second. Plus, in situations where a loan goes into default or suffers recurrent late payments or penalties, those actions are reported on both parties’ bureau reports.
Student Loans
Most everyone who has entertained the idea of helping a student get financing for college has wondered does cosigning a student loan affect my credit? When you place your signature alongside someone else’s on their loan app, it can boost their chance of gaining approval. But there can be negatives of cosigning, particularly if the borrower has a thin credit history or an uncertain source of income. The best way to decide is to review an educational guide that discusses the ways cosigning for student loans can impact your personal credit scores.
What About Refinancing?
Keep in mind that cosigning is not a forever proposal. That’s because many borrowers graduate from college, get good jobs, and then either pay off the debt completely or refinance it in their own names, removing your obligation altogether. In fact, young working adults have a high incentive to refinance once they establish credit. A refi usually means lower rates, better terms, lower monthly payments, and an all-around better deal for the primary borrower.
Hard and Soft Pulls
When you add your name to an application for credit, lenders will typically do a hard pull on your reports to evaluate the chances for repayment by the primary borrower or you. Hard pulls will influence scores, so even if the lender chooses to decline the request for credit, you’ll still have the negative impact of a hard pull. For some loan preapprovals, financial institutions do no-impact soft pulls, but that’s not the case for educational borrowing.
When Cosigning Makes Sense
After studying the situation and evaluating all the potential pitfalls and benefits, you might decide that it makes sense to move ahead with becoming a cosigner. There’s no hard and fast rule about when to do so, but the move can be safe when you have a high level of confidence that the person you help is likely to repay the obligation on time and in full. If a son or daughter asks you to sign alongside them in order to get funds for college, and if they are otherwise creditworthy, then it can make sense to agree to the request. While the decision can affect your credit, sometimes the pros outweigh the cons when it comes to children who have no other way of earning a four-year degree.
When Not to Cosign
Of course, there are several situations in which you should flatly refuse to put your name on an application. If you don’t know the borrower well enough to feel comfortable doing so, then it’s probably not wise to sign. Additionally, avoid legally tying yourself to another person’s indebtedness if they have a spotty work history, a habit of not paying their bills, or no real need for the money.
Beware of recent acquaintances who ask you to help them gain approval on a mortgage or other financial contract by putting your name alongside theirs on the dotted line. The most frequent way people get in trouble when cosigning is by trusting someone they should not trust. Even if the person asking for assistance is a coworker, long-time neighbor, or romantic partner, only go along with the request if you have known them for at least a year and have a clear picture of their financial stability.
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