Are you thinking about becoming a cosigner for someone? Have you ever been asked to cosign on a loan before?
Many people have been asked to cosign loans for family members and even friends. However, many people do not understand the full cosigner meaning, and becoming a cosigner is never something you should do unless you completely understand what it means.
If someone asks you to cosign a loan for them, you might be hesitant to say yes at first. You also might not want to offend the person or make them mad.
Whatever you may be thinking, I want you to fully understand what you are getting yourself into.
Becoming a cosigner can actually turn into a big financial mistake if you do it without really thinking it through.
Okay, now some of you may think that I’m a mean person for saying that, but I’ve heard many stories from people who’ve had their credit wrecked, have been stuck paying a loan for someone else, and even had their relationships ruined.
All of that from cosigning a loan.
Perhaps you have cosigned before and it went fine, or you know a friend of a friend who has done it. Perhaps you think that things won’t go bad for you or that you are hurting the person by not cosigning for them.
But, I want you to be careful before becoming a cosigner. I’m saying this to help you!
No matter how well you think you know someone, mixing money and relationships can change things. What you may have thought was a wonderful friendship or family relationship can turn into a nightmare.
It may seem very innocent – you’re just helping a good friend or relative get a loan.
Really, if it was that simple, I’d tell everyone to do it. But, becoming a cosigner is a major financial decision that you need to seriously think about before agreeing to.
Before you cosign a mortgage or another type of loan for someone, it is always wise to be 100% positive of what cosigning a loan actually means and how it may affect your relationship with the person getting the loan.
Surprisingly, many people don’t know exactly what happens when they agree to being a cosigner. Many people just think that all you’re doing is helping a person get approved, but that’s not just it.
Sorry to break it to you, but the bank, landlord, etc., does not care if the applicant has a friend with a good credit history.
There’s more that comes with being a cosigner.
As the cosigner, what’s actually happening is that you are taking on the full responsibility of the debt if the original applicant is unable to pay.
And, that happens more often than you might think.
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According to a survey I found on CreditCards.com, 38% of cosigners had to pay some or all of a loan that they cosigned for because the primary borrower failed to pay. This is a HUGE percentage of cosigners, so please keep that in mind.
Other statistics I found about becoming a cosigner include:
- 28% of cosigners saw a drop in their credit score because the person that they cosigned on a loan for paid their loan late or skipped a payment.
- 26% of cosigners said that cosigning damaged the relationship with the person that they cosigned a loan for.
- 90% of private student loan borrowers who applied for cosigner release were rejected. So, if you think that you are going to cosign for a loan and then remove yourself from the loan later, that is much more difficult than you probably think. Stat from Consumer Financial Protection Bureau)
So, who is finding cosigners for loans?
According to the survey mentioned above, 45% of cosigners are cosigning for their child or stepchild. And 21% of cosigners are cosigning for a friend.
The rest is a mixture of cosigning for spouses/partners and parents.
Today, I am going to answer common questions about becoming a cosigner for a loan.
What to know about becoming a cosigner.
What is a cosigner?
If you’ve been asked to become a cosigner on a loan, you may not know what that fully entails.
A cosigner is someone who agrees to be on a loan with another person so that they are more likely to be approved.
A cosigner may be needed for different things such as a:
- Car loan
- Student loan
- Apartment or other type of rental home
Here’s an example of when someone may want a cosigner: if your child wants to buy a car but doesn’t have a long enough credit history to be approved for the car loan. Your child may ask you to cosign their loan so the lender takes your credit score and financial information into account. This improves your child’s chances of being approved.
Other reasons you might be asked to be a cosigner is if the borrower doesn’t have a high enough credit score or doesn’t make enough money to pay the loan (that is a red flag right there).
However, as a cosigner, you are agreeing to pay off the debt if the original borrower is unable to pay it in the future. So, even if the original borrower doesn’t pay a penny, the cosigner would have to make all of the payments or risk being sued, having credit report damage, and more.
In that example I gave, the parent would be responsible for the car loan if their child could no longer make their payments. Not only that, if the child for some reason refused to make payments (I’ve heard of situations like this), the parent would be responsible.
Remember, like I stated above, 38% of cosigners had to pay some or all of a loan that they cosigned for because the primary borrower failed to pay.
And in some circumstances, even if the borrower files bankruptcy, while their other loans might be discharged, the cosigner may still be responsible for paying the cosigned loan.
How does a co signer work?
Here’s what happens when you agree to become a cosigner for a friend or family member.
You will start by giving your personal information to the bank or lender. This is information like bank statements, tax returns, paycheck stubs, and so on.
You will also have to complete the loan application, and once you agree with all of the loan terms, then you sign it.
But, becoming a cosigner doesn’t mean that you will own or have partial ownership of the vehicle, house, or whatever else you are cosigning for. It does mean that you are taking full financial responsibility and promising to pay the loan yourself if the borrower does not pay.
Becoming a cosigner is nothing to take lightly.
Does cosigning hurt your credit? Is it bad to be a cosigner?
Becoming a cosigner can hurt your credit score and prevent you from future loans in some circumstances.
- If the person doesn’t pay the monthly payments on time, then you may be rejected for a loan in the future. Missed payments can damage your credit score and your credit report.
- As a cosigner, you are increasing your debt-to-income ratio. So, even if your friend/family member pays every single bill on time, a lender will still see this as YOUR debt. Unfortunately, this may prevent them from approving your loan because they will think you have too much debt on your plate.
If you might be buying something soon that will need financing (house, car, etc.), you should think long and hard before you decide to be a cosigner on someone else’s loan.
Can cosigning a loan hurt a relationship?
Unfortunately, many cosigning relationships go sour.
I have heard many stories where someone cosigned a loan for someone else and then didn’t talk to them for years or even decades because of a falling out of some sort.
I have always been a firm believer that money and relationships do not mix well.
If you are going to cosign or lend money to someone, then you should consider it a gift because there is a chance that you will never see that money again.
Can you remove yourself from a loan as a cosigner?
Remember the statistic above – 90% of private student loan borrowers who applied for cosigner release were rejected.
There’s not much you can do to remove yourself from a loan that you cosigned on. If the person isn’t making payments, you are stuck with it for the most part.
The loan would have to be refinanced to take yourself off the loan, and there are many horror stories out there where the original borrower refused to refinance because then they wouldn’t be able to force the cosigner to continue to pay the monthly bill.
Plus, there are instances in which refinancing is impossible because of the value decreasing, the economy changing, a person’s financial situation getting worse, and so on.
So, while the original borrower may be okay with getting you off of the loan and refinancing, it’s still up to the lender whether or not they will refinance the loan.
How do I protect myself as a cosigner?
There is no guarantee that becoming a cosigner is going to work out, but if you’re determined to do it, you will want to know both of these two things for sure:
- That you can trust the person you are cosigning for.
- That YOU can make the payment.
Many people who are thinking about becoming a cosigner may not think about that last one, but it is just as important as the first one. Being stuck with the loan payment would be awful, but not being able to make the payment could cause you to go into serious debt and destroy your credit.
You may be certain you won’t be stuck making the payment, but you don’t want to be stuck in a bad financial situation.
Should I cosign a loan?
Even though those cosigning horror stories are real cautionary tales, most people don’t believe they would ever happen to them.
However, don’t you think most (if not all) cosigners felt the same way in the beginning?
It’s up to each person to decide if they will cosign, and you should never feel forced to do it. However, I want you to remember that if you cosign, then you should make sure that you can afford to make the monthly payment.
You never know, one day those payments are being made and everything is going well. The original borrower may be a great person, but then they may lose their job, have an unexpected expense come up, or something else that prevents them from paying their bills.
Then, what if something happens to you and you can’t make those payments either? Unfortunately, being unprepared and not really knowing what you are getting into can turn into a disastrous situation.
Cosigning a loan may not always be bad. However, I believe it’s better to realize what the consequences are before going into something that can negatively impact your life. It’s always better to be prepared!
Is it a bad idea to cosign for someone?
Cosigning a loan doesn’t always have to be a bad thing.
However, I want you to remember that there is a chance that you will be on the hook for the loan.
So, if you cosign, whether that be for a car, mortgage, apartment, student loan, or something else, you should make sure that you can afford the payment as well. Because, there is a chance that you may have to pay it one day.
Everyone has a different situation, and ultimately, you have to do what’s right for you.
What do you think of becoming a cosigner for a mortgage or other type of loan? Would you ever do it?