There’s more to co-signing a loan than just lending your signature. Before you help a family member or loved one, make sure you understand the impact that co-signing a loan can have on your finances and credit score.
What does “co-signing” a loan mean and what are your responsibilities?
What does “co-signing” a loan mean and what are my responsibilities?
[Visual of a young woman holding a very large pen next to a large sheet of paper reading “DAUGHTER.” “LOAN OR CREDIT CARD APPLICATION” appears above. A dad figure appears using the large pen to sign the paper. “FATHER” appears next to “DAUGHTER”]
[Visual of daughter on tight wire with the word “LOAN” attached to the wire. Dad looks on tied to the daughter via rope. He is holding a large folder reading “CREDIT REPORT”]
So, someone’s asked you to co-sign on a loan. So what does that mean? Well, when you co-sign on a loan or credit card application, you formally take on legal responsibility for the account, which means any debt and payments will appear on your credit report. More importantly, if that person misses a payment, or worse yet, defaults on the loan, the negative impact will be felt on your credit report, and the creditor may even require you to pay the balance.
[Visual of daughter hugging dad while he signs loan papers next to a car. A giant bow appears on the car, and “FIRST CAR” appears above the bow]
[Visual of son and daughter sitting across from a desk that reads “LENDER.” A woman with a speech bubble appears. Speech bubble reads “PARTNERSHIP”]
So, why would anyone co-sign a loan? Well, co-signing can help the original borrower get approved or sometimes get a better rate on the loan, due to your good credit history. For example, your good old son or daughter may get a much better rate on the loan for their first car, since they’ve, you know, they’re just establishing credit, and you’ve had a much longer history of managing debt well. Keep in mind – once you sign, you’re in a partnership. It’s your loan as much as your co-signer’s.
[Visual of daughter sitting in a chair holding head, appearing sick. Dad appears smiling and holding a large pill bottle. The bottle reads “FUNDS.” Dad has speech bubble appearing reading “I’VE GOT YOU COVERED”]
Now, it’s extremely difficult to remove a co-signer from a loan, so make sure you know and trust the person before agreeing.If a hardship happens, like an illness or a job loss, make sure you’re in a financial situation where you’re able to take on and can pay the extra debt if the other person can’t. If you co-sign a loan, as far as lenders are concerned, it’s your debt. And if you’re unable to make the payments on the loan, your credit may be harmed.
[Visual of dad on top of stairs looking down at box reading “NEW CREDIT” below. “DEBT TO INCOME RATIO” appears on stairs below dad.]
You should also be aware that co-signing a loan may impact your ability to obtain new credit down the road, such as a car loan. Since you are legally responsible for the co-signed loan, it impacts your debt-to-income ratio. And if your debt-to-income ratio is too high, lenders may be less willing to extend more credit. If you do ever co-sign for a loan, treat it as you would your own.
[Visual of desk appears. Next, dad appears sitting and reviewing papers. Lastly, daughter appears smiling and hugging dad again while also reviewing papers.]
Make sure you know payments are being made and what the balances are. This not only helps you avoid unpleasant surprises down the road, it gives you the opportunity to offer some guidance, so the person you co-sign for gets started down the right path to building or rebuilding their own strong credit history.
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