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Cosigning for a personal loan means putting your credit on the line. Before you do that, consider these potential consequences.
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Personal loans can be a great way to borrow money, but you have to be qualified to get one. Most creditors want at least fair credit to approve someone to get a personal loan, and lenders also require proof of income to repay the debt.
Sometimes, when a borrower isn’t qualified to get a personal loan on their own, they’ll be given the opportunity to apply with a cosigner. If you have a decent credit score and make a good living, you may be asked to be that cosigner for a friend or loved one. If that happens to you, should you say yes and agree to help them borrow?
Here’s what cosigning means for you
Before you consider moving forward with cosigning for a personal loan, you need to understand what this could mean for you and your finances.
When you cosign, you apply with the primary borrower. The lender considers your credentials and may offer a loan it otherwise wouldn’t because you are vouching for the borrower. The problem is, you’re also committing yourself to being responsible for the debt.
The personal loan is going to show up on your credit report, so if you want to do some borrowing of your own, lenders are going to see that debt as yours and count it in your debt-to-income ratio. This is the percentage of your income you’re paying toward debt, and it’s used to determine if you’re allowed to borrow. If you owe too much, you may not be approved for a loan of your own.
If the primary borrower is late with a payment or stops paying entirely, you’ve got even bigger problems. The late payments are going to show up on your credit report, which is very bad news since even a single late payment could cause your good credit score to plummet by 110 points. If the loan goes into default or gets sent to collections, you can expect your score to suffer even more.
You’re also agreeing to be responsible for paying back the loan if the primary borrower doesn’t. So, not only could your credit score be damaged, but the lender could also come after you to try to get the money. You could get stuck covering the payments out of your checking account.
All in all, you’re taking on a ton of risk when you agree to cosign for a loan — and you need to make sure you’re comfortable with that before moving forward.
Is cosigning for a loan a good idea?
The sad reality is, when you cosign for a personal loan, you are putting your own finances on the line. And there’s no guarantee that will work out well for you.
The percentage of people who are 60 days delinquent on personal loans is 3.62%, which means most borrowers don’t fall far behind on payments. But, when someone needs a cosigner, it’s because the lender views them as being at high risk of defaulting. In other words, something in their financial record has raised a red flag with a lender — and lenders are experts at evaluating risk.
Now, if the person you’re cosigning for just hasn’t had a change to establish credit, that may not be a huge problem. But, if they don’t have enough money to pay the loan or if they have a bad credit score because of tons of past missed payments, there’s a very good chance they’ll get into trouble with the loan you’re agreeing to be responsible for.
Ultimately, you need to carefully consider two things: how much you trust the person you’re cosigning for and what will happen if they can’t pay. Unless you trust them a whole lot and you could afford to pay back the loan if things went wrong, you should absolutely say no to cosigning for someone else’s personal loan.
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