When friends or relatives can’t secure a loan on their own, they may ask you to help by co-signing. A cosigner is often required for someone to secure a loan if they have poor credit history, or a lack of credit history.
Deciding whether or not to cosign on someone else’s loan is a personal decision. However, there are some red flags to be aware of, and it’s important to understand that co-signing carries significant risk without much reward. Here are five signs you shouldn’t cosign a loan.
The person in need of a cosigner has a history of late payments
Individuals often need a cosigner when their own credit has too many negative marks to secure the credit on their own. Generally, this means that they have had difficulty making payments on time in the past and their credit has taken a hit as a result.
If you know that the person making the request has recently struggled with timely bill payments, it may not be a good idea to cosign. If payments are missed, you’ll be liable to repay missed payments immediately and risk having to pay the full loan balance if the co-borrower defaults.
You anticipate needing a loan of your own in the upcoming months
Co-signing also affects your debt-to-income ratio. Even though you’re not the primary borrower, the loan will appear on your credit report. You’re liable for the payment of this loan, so it could affect your ability to secure a loan of your own. Before you cosign, consider your current financial situation and whether or not you’ll need your credit for your own purposes.
You don’t have backup savings in case anything goes wrong
If the primary borrower misses any payments, you’re liable for those payments as the cosigner. Cosigners need to monitor the status of the loan and make sure all payments are made on time. They should also have backup funds in case the primary borrower lapses in payments.
You’re worried about your own credit
If you have concerns about how co-signing will affect your own credit, it’s probably not a good idea. If the primary borrower defaults, this could harm your credit, and it can be difficult to rebuild.
Your instincts are telling you not to do it
Plain and simple: if you have a bad feeling about it, don’t cosign. It’s likely not worth the worry and risk, especially if the primary borrower has a troubled credit history.