5 Things to Consider Before Cosigning a Loan

 

5 Things to Consider Before Cosigning a Loan

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What does cosigning a loan mean?

When you co-sign a loan, you promise to pay off somebody else’s debt if the borrower stops making payments for any reason. In the case of the friend or family member mentioned above, it means that they are a high-risk candidate and the lender needs to know that if they can’t pay the loan, you will step in and make the payments. This not only helps the applicant get a loan, but it might also help them get a lower interest rate and fees.

1. Credit Score Could Be Impacted

Let’s say you cosign for a friend, and while the loan is still outstanding, you need a loan for yourself. You might find that your application gets denied because your credit score is too low as the co-signed loan information is reported on the credit reports of both loan applicants.  The credit inquiry, balance and newly opened account can reduce points. Another scenario could be that your friend doesn’t pay the loan payments on time. Since you cosigned the loan, this late payment history will be reported to the credit bureau and negatively affect your credit score.

2. Level of Debt Increases

As mentioned earlier, the loan that you co-signed for will appear as debt on your credit history too and will affect your loan-to-income ratio. Thus, when a bank reviews your application for a loan or Credit Card, they would be taking this debt too into consideration and then determine your worthiness to qualify for additional loans. If the co-signed loan makes your debt-to-income ratio too high, this might hinder your chances of being approved for a loan or Credit Card.

3. Savings Might Suffer

You’ve worked hard to save money for things you need now or for your future retirement. What’s going to happen if the person you cosigned with loses his or her job or gets a pay cut and can’t make full payments on the loan? Do you have enough money coming in every month to pay the loan, or will you have to dig into your savings so you can make the payments? If you have to go into savings (or stop your savings plan), that could have a huge effect on your financial future.

4. Responsible for Repayment if they Defaults

When you co-sign a loan, you’re taking on the responsibility of making repayments if your loved one misses out on or fails to make any repayments. In fact, your loved one may still be able to get off the hook by claiming bankruptcy, but the lender will come after you for repayment of this loan. In the event that your loved one is let off the hook, the sole responsibility for repaying the debt will squarely fall on your shoulders and you may even be sued for the debt and have a negative entry in your credit report. It may take you years to get a negative entry removed from your credit report.

5. Reduced Ability to Borrow

When you co-sign a loan, other lenders see that you are responsible for the loan. As a result, they assume that you’ll be the one making payments.

Co-signing reduces the amount of your monthly income that is available to make payments on new loans. Even though you’re not borrowing and even if you never have to make a single payment on the loans you co-sign for it’s harder for you to qualify for another loan in your own name.

You can apply for an attractive offer with best possible Rate of Interest and Terms for Personal Loan, Business Loan, Home Loan and Car Refinance Loan.

FundsTiger is an Online Lending Marketplace where you can avail fast and easy Home, Business and Personal Loans via 40+ Banks and NBFCs at best possible rates. We will also help you to improve your Credit Score. We have dedicated Relationship Managers who assist you at every step of the process. We can also help you in Balance Transfers that will help you reduce your Interest Outgo

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