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How Co-Signing For A Loan Can Affect Your Financial Future

How Co-Signing For A Loan Can Affect Your Financial Future February 11, 2016Leave a comment

I am an economist and the founder and owner of Finance Blog Zone

co-signing for a loan

With a poor economic climate all around the world for the past number of years, many consumers have faced difficulty in their financial lives. As more and more people are relying on loans to make purchases such as vehicles and for educational purposes than ever before, these past credit problems often come back to haunt them. Many lenders, cautious about a potential borrowers past history, will required a co-signer to approve the loan. Co-signing for a loan of a friend or family member is a nice gesture, but before you do so it is vital that you understand the process and the possible ramifications for your credit and finances.

Why Lenders Require A Loan Co-Signer

When deciding whether to approve or deny a loan, a lender can ask the potential borrower to find a co-signer. This is most often because of a poor credit history, but can also be common in cases where the person applying for the loan has little to no credit history of their own, such as a young adult just out of college. Lenders look at this past data to determine how likely the borrower is to pay back the loan or fulfill a contractual obligation such as paying rent on a leased apartment. If the application has bad credit or no credit, the lender may need added assurance that the loan will get paid. This is where the co-signer comes into play.

Co-signers are generally someone that is secure financially and has a proven track record of paying loans and other credit sources such as credit cards and lines of credit.

Co-Signing For A Loan Makes You Fully Responsible

If you’re approached by someone close to you to become the co-signer on a loan, you should exercise caution before agreeing to do so. As a co-signer, you become legally obligated to complete repayment in the event that the borrower stops paying. Failing to do so will drag your credit profile down alongside theirs. Additionally, the lender can come after you through the court system in order to recoup any remaining unpaid balance. From a legal standpoint, there is little difference between you as the loan co-signer and the person who initially borrowed the money or signed the lease.

When You Should Co-Sign For A Loan?

With the risk associated with co-signing for a loan, it is something that should only be done when necessary and when you fully trust the individual you are signing with. Most commonly, co-signers are family members of the borrower (often times parents) or very close friends. Before agreeing to sign off on any loan, here are a few things to consider that can help ensure that your financial future is not put in jeopardy by the fiscal negligence of someone else:

  • Have a close relationship with the person you are co-signing for a loan . If this person is not a direct family member or a friend you have had for years, politely declining may be the smart choice.
  • If someone asks you to co-sign with them, there is nothing wrong with asking for their financial information. You should have a good understanding of the signer’s income and expenses so that you can ensure that are financially able to afford the repayment of the loan.
  • Don’t be blinded by your relationship. Take an objective look at the borrower’s history. Do they routinely miss payments or skip out on leases? If they don’t take their financial health seriously, it’s their business, but don’t involve yourself in such a risky situation.

Co-signing for a loan is a very nice act and a great way to help someone close to you to obtain a needed loan. Doing so should be approached with caution though, as you need to care for your financial health first and foremost. Co-signing makes you just as liable as the borrower. If they have a negligent track record in the past, or are not financially secure enough to make on-time payments, your credit can be dragged down too. Anytime you’re asked to co-sign a loan, be sure to look at the situation objectively before agreeing to put your assets and future loan acceptance in danger.

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I am an economist and the founder and owner of Finance Blog Zone

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