Cosigning a Loan: Is It Good to Have a Co-signer?

Whether you are looking to take out a loan to buy a house or a car, or you are just looking for some extra cash, you need to carefully choose the right one for you. Nowadays, a lot of people go for the option of signing with a co-signer. What does co-signing means? In this article, we will explain in debt the meaning of co-signing for a loan and what happens when you do co-sign a loan.

In some cases, having a co-signer is a must in order to be approved for a loan. If you are looking to take a loan with a co-signer, make sure that you understand that all the responsibility falls onto your co-signer if you fail to make your payments on time.

With that said, in some situations, having a co-signer can be a good thing.

• You are unable to get a loan without having a co-signer
  
• Want to share the risks of taking out a loan
  
• You are not able to afford to lose the money that you put as a collateral

Before making any decision, make sure that you know what you are getting into and that you are able to repay the loan back.

What Is a Co-signer and What Does It Do?

Now that we covered some basics, let’s explain what a co-signed loan is. So, if you are looking to have a co-signer or you are looking to be one, it basically means that you are guaranteeing the loan. Simply put, if you are co-signing on a loan, in case the borrower is unable to repay the loan back, you are becoming the responsible person for repaying it back. In some cases, if the borrower fails to repay the loan back and the responsibility falls to the co-signer, the lender may reduce or even forget the debt amount.

In other words, a loan co-signer is a person that is guaranteeing for you in order to get the loan. Once you halt your payments on the loan, the co-signer starts paying it back with its own money. So before taking a co-signer or you becoming a person who is going to co-sign, make sure that you fully understand what the risks of co-signing a loan are.

CoSigning vs. Co-Borrowing: What’s the Difference?

A lot of people confuse co-signing with co-borrowing. The main difference between them is that when you are co-signing, you legally become the responsible person to repay the loan back in case the borrower defaults on the loan. On the other hand, co-borrowing is when you give someone else your credit card number so that they can borrow money from a lender. When it comes to co-borrowing, typically, you are not legally responsible for repaying the debt if the borrower defaults on the loan. However, if you do co-borrow with someone and they halt their payments, you can be liable for their debt.

Co-signing a Loan: Pros and Cons

Before making a decision on whether or not to co-sign a loan, it’s very important to weigh out the pros and cons of doing so. Here we will give you a lost of some benefits and drawbacks.

Pros:

• Possibility to improve credit scores for both sides
  
• Lower interest rates
  
• Makes getting a loan easier

Cons:

• Co-signer’s credit can take a hit
  
• The relationship can be ruined
  
• Co-signer is at risk of legal action and collections costs if the loan is unpaid

Pros

In some situations, it can be a good thing to have or to be a co-signer. The first one being is that the borrower is going to get lower interest rates in comparison to not having a co-signer. Also, if it’s a family member or a good friend, you can help them secure the loan if they have bad credit or the lender requires a co-signer in order to approve them a loan. And finally, when the borrower repays the loan in time, it can boost your credit score for the future.

Cons

On the other hand, becoming a co-signer can be a bad thing. In the case the borrower defaults on their loan, you are responsible for paying it back in full and on time. If that happens, your credit score is taking a huge hit, and you could have problems in the future if you are looking to take out a loan or a mortgage. And finally, the lender is going to go after you if the loan is unpaid, and they can even take legal action against you.

Does Co-Signing Hurt Your Credit?

The answer is yes! If you are a co-signer, in the situation that the borrower misses or completely halts the loan, your credit score is taking a hit since the only reason they got a loan is because of your good credit. If that happens, the bank gives you a call, and the lender turns to you for the repayment of the loan. So, before you put your name on the line as a co-signer, make sure that you understand the risks and that you are positive that the borrower is going to be able to repay the loan on time and in full.

Is Co-signing a Loan a Good Idea?

As we already mentioned above, when you co-sign a loan, you are legally bonded to repay the loan back in case the borrower is unable to do so. This can be a helpful solution if you know and trust a borrower since you are helping them secure the loan.

On the other hand, if they are not able to make their monthly payments or they default on the loan, you are the one held responsible for paying it back. Now, we can’t tell you to do it or not to do it since it all depends on you and if you are ready for that amount of responsibility.

That’s why it’s always good to do proper research and to always consult with an expert before making any decision.

When Does Cosigning a Loan Make Sense?

There are some situations when it makes sense to co-sign the loan. The first one is that you have a good relationship with the borrower, and you trust them that they will repay the loan in full on time. The second one is that you co-signing the loan is the only way for a borrower to be approved for one.

With that said, the decision lies with you if you are ready to take that responsibility on yourself. If the answer is yes, congratulations, you are helping someone and doing a good thing. However, if you decide against it, it’s understandable since not everyone is ready to put their finances on the line.

Final Thoughts

Co-signing a loan can have both good and bad sides. It can be a great way to help a family member or friend get the needed funding, but also it can ruin your credit score if they default on the loan. Here, we talked more about co-signing, what it brings and how it works.

At the end of the day, our advice is to make a plan with a borrower if you decide to co-sign and do your research and consult with a financial advisor to learn more.