It Is High Risk, Low Reward
When you agree to be a cosigner, you’re basically entering an agreement that is highly risky, yet offers no rewards or tangible benefits.
For instance, if you cosign a car loan, you’re legally liable to make payments if the primary borrower defaults.
The lender has the complete right to sue you for pending repayments. Moreover, missed and delayed payments will also be listed in your credit report.
You won’t have any legal authority over the vehicle, but you’ll have to settle with full liability of the outstanding loan. Even if the borrower makes ontime payments, you’ll see only a modest growth in your own credit score.
Most importantly, you’ll increase your debt-to-income ratio even when you don’t necessarily need to open a new credit line.
In simpler terms, the financial risks overshadow the rewards.
It Can Lead To Tricky Situations With Friends And Family
As a cosigner, you will have expectations from the primary borrower for certain things such as making payments on time.
When you’re liable for the loans, yet don’t have any authority over the car, it might take a toll on your relationship.
The damage it causes to relationships can’t be expressed in numbers. It also puts an undue emotional strain on both parties.
According to a recent survey conducted by Bankrate, more than 21% of the surveyed people said that their relationship was damaged because of lending money to friends and families.
Financial experts have pointed out that cosigning a car loan for a friend or family member is a risky proposition, one that ends up badly most of the time.
Not only will you increase the chances of losing money, but you’ll also increase the chances of wrecking your relationship.
You Will Be 100% Liable In Any Case
Cosigning a loan makes you responsible for the balance if the primary borrower refuses to pay or can’t pay.
You’ll be stuck and forced to pay off the debt or face legal consequences. The only options that you’ll be left with are either to pay off the debt on your own or work it out with the primary borrower.
Furthermore, this repayment isn’t just limited to a few months of missed payments.
You are responsible for the total amount due over the life of the loan. Other than the financial aspect, you’ll also face a severe impact on the credit score.
Even if the primary borrower passes on before the loan is repaid, the cosigner will be liable to make the remaining payment.
The lender has legal authority to sue the cosigner when payments are in default. Hence, irrespective of the circumstances, you’re 100% liable to repay the debt.
Your Cosigner's Behavior Could Impact Your Credit
When you cosign a loan, it makes it hard for you to apply for a new credit line on your own while the car loan is due.
Your credit score will be at risk when you sign the loan with the primary borrower.
Lenders will pull your credit report, which will temporarily impact your credit score all while your debt-to-income ratio increases.
If the borrower defaults, and you can’t make the payments on their behalf, the default will be reflected on your credit report for up to six years.
Any missed payment will impact your credit score, thus making you ineligible for new loans and credits.
While these damages can be mitigated, it will ideally take years before they are cleared off of your credit history.
If You Are Not Organized, Things Can Go Very Wrong
Keeping track of your own expenses is hard enough. When you have to keep track of upcoming payments on someone else’s car loan, the trouble just multiplies.
You’ll have to keep in touch with the lender every month to make sure the payments are made on time.
Simultaneously, you’ll also need to keep reminding the primary borrower to make the payments on or before the due date.
This is a lot of extra hassle considering the fact that there is literally no reward for you in the entire bargain.
If you want to go ahead and cosign a loan, it is important to take every step to protect yourself.
Obtain copies of the loan agreement and keep in touch with the lender to stay updated on changes in payment terms, late fees, or interest rates.
Consider your own finances and calculate if it’s possible for you to take up new liabilities.
Depending on the overall situation, cosigning for a friend or family can be a justifiable decision.
However, just make sure that you evaluate the aforementioned risks above before agreeing to cosign for somebody you trust.
Above all, establish a clear communication channel so you don’t end up with a lower credit score and a broken relationship.