Friday, August 14, 2015

3 Top Risks to Co-Signing for a Loan


While most people understand what it means to be the primary borrower on a loan - not everyone knows what is involved in Co-signing on a Loan. When you co-sign for a loan, you take on additional financial responsibility for the loan and there are inherent risks. It's important to fully understand how co-signing on a loan will effect your financial profile before saying "yes" to your friend or family member.


Risk: You are Responsible for the Loan. 

If, for any reason, the primary borrower misses or can no longer make payments, the lender will expect you to pay. If you are incapable of making those additional payments - rethink co-signing.


Risk: Missed or Late Payments Will Hurt Your Credit. 

In most cases, primary borrowers need a co-signing borrower because they either have poor or limited credit. This is especially common for student loans. While timely payments on the loan will improve their credit history - late or missed payments will seriously damage your credit. 


Risk: Your Debt Will Be Higher for Future Qualifications. 


As we mentioned, you are responsible for the loan if the primary borrower fails to make payments. If you are planning on trying to qualify for financing (or a home loan, auto loan, credit card etc.) in the near future - keep in mind that this loan will be added to your overall debt. This could substantially lower your credit score and cause you to be declined. 

Now even with these key risks to being a co-signer, it may still be the right decision for you. If so - take the following precautions to protect yourself.

Review the details. 

This seems like a no-brainer but it's worth emphasis. Make sure you know the terms of the loan and retain copies of all of the documents involved. Always read (and possibly have an attorney review) the details before you sign ANYTHING.

Know the Law. 

Depending on your state, lenders may be able to go after you for repayment even if the primary borrower dies. Some quick research up-front will let you know what your rights are.

If the worst should happen and you become responsible for the loan - be proactive! Try to negotiate with the lender for lower payments or a settlement. If needed, seek legal advice to make sure you know your rights and the steps to take.  


If you have a mortgage AND a car loan, student loan or credit card debt - you can reduce your monthly costs with a SmartREFi™



Photo credit: iStockPhoto

Midwest Equity Mortgage

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