Saying yes to your best friend or a family member to become a co-signer in a loan is a risk.
You need to know the consequences that you might face in case the borrower fails to pay.
Here are the things you need to consider before co-signing the loan:
#1- It is also your loan
When you cosign the loan, you are sharing the responsibility with the borrower. Know that you will be shouldering the charges, interests, and late fees that will pile up if the borrower failed to settle the payment on time.
#2- Your responsibility remains until the debt is paid
Because you sign the loan contract, ask if there is a cosigner release clause. Remember that your name remains as co-borrower until the debt is paid. If the borrower qualifies for refinancing scheme, it is possible to ask for the removal of your name as co-signer.
#3- It affects your credit score
As soon as you sign your name, the obligation becomes part of your credit record. Your responsibility is equal to the principal borrower. It means that the amount will be figured into the debt to income ratio, which can negatively affect your credit score.
Know that outstanding obligations comprised 30% of the credit score. If the loan is in full, the credit rating of the borrower will be boosted while yours remain the same. In short, you take the risk but no reward, except the gratitude of your friend or your relative.
#4- Find another way to help
Instead of saying yes, help her/him find other options like suggesting that they seek the assistance of Debt Settlement Company. This kind of company helps people get out of their debts quicker and save money. Just make sure that you find the most reputable firm.
With this knowledge, you will be more aware of the risks of cosigning a loan. Be smart and protect your personal credit score by saying no.