If you refuse to co-sign a loan, the person who is in need of help can feel that you are the most despicable person on earth. But that’s okay, they have a right to their opinion. Even if you understand that co-signing can help someone who has no credit history, you should also understand that the risks outweigh the benefits. Before you put your name on the dotted line, check out a few reasons why co-signing is a bad idea.
1. It’s your debt
By signing your name to someone’s loan application, you’re legally responsible for repaying the whole loan. Even if you have never made a loan payment, this debt is not only forever attached to your name, but it also appears on your credit report. If the person stops paying, you will have to pay this debt off in full. That’s one of the reason co-signing is really a bad idea!
2. Late payments will reflect on your credit report
Do you have a perfect payment history? Co-sign for another person’s loan and you could tarnish your credit record. If the primary signer starts paying bills late, it can appear on your credit report. It doesn’t matter whether you are the cosigner or the primary signer, a late payment can hurt your credit scores.
3. You gamble with your score
When you take out a new loan or acquire a new credit card, you trigger a drop in your credit score. This decrease is usually temporary, and you can rebuild your credit, but why gamble with your credit score for a loan that you don’t want? If you’re trying to build a good credit history, don’t risk your score.
4. Damage stays on your credit report for 7 years
If the primary borrower stops paying completely, and you can’t pay back the loan, this default appears on your credit report. In case of a mortgage or an auto loan, this can trigger a foreclosure or repossession. If this information is in your credit report, it remains for more than 7 years.
5. It increases your debt to income ratio
Most lenders check an applicant’s debt to income ratio before approving any loan. It is your percentage of a debt in relation to your monthly gross income. Co-signing a loan increases your debt to income ratio. When you decide to apply for a loan, a lender may think that you can’t afford a new debt and your application will be rejected.
6. You are not notified of late payment
Usually co-signers don’t know about the problems with an account until it’s too late. The monthly repayment statement isn’t delivered to you, and you won’t have access to the account online and you can’t see the primary borrower’s activity. You should only trust that the primary signer will pay on time.
7. You can’t remove your name from a co-signed loan
Once you co-sign a loan, it’s a done deal. You can’t change anything. You are attached to the loan until the primary borrower pays off the debt. Generally, the only way to have your name removed from a co-signed loan is to completely pay that debt off.
These are all reasons co-signing is not a good idea. Has anyone ever asked you to co-sign a loan? What decision did you make? Do you know some other reasons why co-signing is a bad idea? Share your thoughts, please!