There comes a time when most people will be asked to co-sign a loan for a friend or a family member. Co-signing a loan enables another individual to benefit from your own income and credit history, but it comes with a significant amount of liability and risk. Though co-signing a loan does help others, there are generally reasons as to why an individual represents a credit risk.
The Situation May Already Be Untenable
Sometimes an individual needs a co-signer for a loan simply because they have no credit history. But this isn’t the most common situation. Other times, an individual needs a co-signer because they don’t have the appropriate amount of income or they have a bad credit rating. If the individual does not have enough income for the loan, then they will likely have problems repaying the loan even with a co-signer. If the individual has bad credit, this usually indicates that they might have a bad habit of not paying their loans.
You’ll Be Liable for the Loan
Co-signing is a significant risk because you will become fully liable for the loan if the individual in question cannot repay it. You won’t be liable for half the loan; you’re responsible for every single payment that needs to be made. And that also means that you will have your credit score adversely affected every time there are late payments. You may not know about those late payments either; you’ll need to stay current on the loan statements to make sure that it is being paid on time.
The Loan May Affect Your Own Financial Situation
When you co-sign a loan, you essentially take that loan out yourself. If you need your own loan later on, you may not be able to get one; the loan will be counted against the amount of money that you’ve personally taken out.