What Does it Mean to Co-Sign a Loan?
When you co-sign a loan, you promise to pay off the loan in the event the primary borrower is unable to pay off the loan. A co-signer becomes necessary when the person applying for the loan doesn’t have sufficient credit history, reliability or income to get the loan on his own. For example, people who have a history of defaulting on loan payments likely wouldn’t be approved, neither would a recent graduate who hasn’t had time to build credit. If you’ve been asked to co-sign a loan or find yourself in need of a co-signer, here’s how it works.
Should I co-sign a loan?
It’s probably most common for parents to co-sign loans for their children who have yet to build a credit history, but other relatives and friends may also come to you. No matter who asks you to act as a co-signer, it’s a decision you should weigh carefully. After all, you’re being asked because the borrower was turned down. If you trust the borrower and have confidence in his or her ability to repay the loan, co-signing can be a generous way to help a friend or family member in need.
First of all, to be eligible to co-sign, you have to have a strong credit score. If you’re able to co-sign, make sure you have an accurate picture of what it will mean to you and your financial situation:
- Be sure you can afford to pay off the debt if the borrower defaults. If you had to assume the payments for this loan and it would hurt you financially, you probably should not co-sign the loan.
- Get copies of all the loan paperwork, and be sure you understand the terms fully before agreeing. Sometimes the responsibility of the co-signer varies, and you’ll want to take note of when you’ll be contacted or what you’ll be responsible for paying.
- Consider what co-signing a loan will do to your credit score; this loan will appear on your credit report. If you plan to take out a loan yourself in the near future, you may not want to co-sign now as it will increase your apparent debt load and could potentially hurt your ability to be approved.Continue reading→