Don’t Cosign a Loan Ever. Here’s Why
No good deed ever goes unpunished. Whoever coined that phrase may have once made the bad decision to cosign a loan. If you cosign a loan, you assume full responsibility to pay it off if the borrower can’t pay. The borrower may be a relative, friend, or significant other. But familial relationships shouldn’t predicate being a cosigner. The financial responsibility of the borrower should.
I refused to cosign a loan for a friend. It affected our friendship, but that was beyond my control. I have had financial problems in my life. In fact, it took time for me to become financially mature. A borrower for a loan may want a house, car, or loan for which they can’t qualify on their own. Nothing in life comes easy. Sometimes we must sacrifice and wait for what we want.
Moreover, as a cosigner, you are assuming all the risk. If you are financially mature, secure and have great credit, you are risking your financial solvency to cosign a loan for someone who can’t qualify for one. If you end up having to fully pay for the loan, what will the borrower do for you?
This isn’t about cruelty. It’s about being financially realistic and responsible. And demanding it from the borrower. There are many good reasons why you should never cosign for a loan. Or, at least think a lot more than twice about it.
Technically and Legally You Are 100% Responsible
Technically and legally you are assuming responsibility for the loan. If the lender will only release a loan via cosigner, it’s because they don’t believe the borrower can cover payments on their own. Realize that you are assuming full responsibility for the loan until it is paid in full. If the primary borrower dies, becomes unemployed, misses payments, or just refuses to pay – it’s all on you. The borrower won’t be legally responsible for paying back the loan. Just you. Alone.
Credit Score Damage
Once you agree to become a cosigner, lenders and credit bureaus can perform a hard inquiry on your credit report, which could cost you a loss of five credit points or more. It’s temporary, but as a cosigner, this is what you face if you to cosign a loan. If you must assume responsibility for the loan for whatever reason, missing payments, or payment delinquency will damage your credit further.
You May Damage Your Own Chances For Loans
Cosigning a loan might make someone else very happy. However, you might just hinder your own chances for a loan in the future. It could appear on your credit reports as though you have too many loans. Or, for having too much credit relative to income. Cosigning for a loan may stretch your credit too thin in the future.
If the borrower defaults on a loan, you could be sued by the lender to collect the debt. Your financial accounts could be frozen. Or, your paycheck might be garnished. If the loan was for a sizable amount, you might even find yourself contemplating suing the borrower to help alleviate the financial burden you assumed for yourself.
Think it Through
You may have never asked someone to cosign for a loan. I never did. Life is not always easy, and owning a house or car takes time and sacrifice. And – sometimes hard lessons. Someone who needs a cosigner for a loan is not financially ready for they want. Saying no may affect your relationship with this person. So be it. It will teach them to strive harder. Otherwise, accept that the word, “cosigner,” is a misnomer. Technically and legally, you are accepting full responsibility for the loan.
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Allen Francis is a full-time writer, prolific comic book investor and author of The Casual’s Guide: Why You Should Get Into Comic Book Investing. Allen holds a BA degree from Marymount Manhattan College. Before becoming a writer Allen was an academic advisor, librarian, and college adjunct for many years. Allen is an advocate of best personal financial practices including saving and investing in your own small business.
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