In your life you may get trapped into tough financial bind and have to face thousands of odd situations. There can be situations where you have to take out loans to purchase a new car or repay your credit card debts. Your credit score will be quite low and in such a situation you cannot apply for a new credit for your loved ones which is acutely required. The only way you can help them is you have to co-sign a loan for them. Although it’s a helpful gesture to help people in tough times, but you have to consider certain things when you co-sign for a loan.
Your credit score will decrease:
If you’re not a borrower and just a co signer for a loan, then also it will be reported to the credit bureaus. This loan will appear both on the credit reports of the borrower as well as the co-signer. Hence, if the borrower fails to repay the amount, then you’ll be responsible to pay the amount and your credit score will be negatively affected.
Difficult to apply for a new credit:
If in future you have to take out loans to repay your credit card bills or refinancing your home loans then you may be charged high rate of interest. It’s because, according to the lender you’re liable to pay the loan you have co-signed. Moreover, your debt to income ratio will not be favorable to provide you a new loan. Hence, co-signing a loan might affect your chances of getting a loan in future.
You might get sued:
While you co-sign for a loan, it doesn’t mean that you’re only liable to repay the loan amount but you have to take the responsibility of paying the late fees and unpaid accrued interest. If the borrower fails to pay down the amount, then the debt might be handed over to the collection agency and situation will get worse. They may even sue you or the court might order them to garnish your wages and put a lien on your assets.
According to the recent study by the Federal Trade Commission, 75% of all the co-signed loans that have gone into default have been paid by the co-signer. Hence, there are quite a number of potential hazards of co-signing a loan. So if you have to help somebody, then you must limit your liability as a co-signer.