Definition
When you co-sign on a loan, it means that in the event that the borrower cannot make the payments on the loans, you will take over responsibility for the loan. In other words, you're just as liable for the loan as the person requesting the loan. If the loan goes into default and late fees are associated with the debt, you will also be responsible for those penalties.
Credit Score
The loan will appear on your credit report just as any other debt would, which increases your debt-to-income ratio. This may make it difficult for you to obtain any new credit of your own. Additionally, the lender must make an inquiry into your credit report, which has a small negative effect on your score. Any late or missed payments are also reflected on your credit report and will cause your score to drop.
Warnings
According to the Federal Trade Commission, studies on certain types of loans have shown that in three out of four cases in loans that go into default, co-signers are asked to pay. Also, if the lender asks for collateral for the loan, such as your home or your car, you risk losing those assets if the loan goes into default.
Considerations
Before agreeing to co-sign on a loan, make sure that you can pay the loan if needed. Even if the person requesting the loan has the ability to make payments now, he may lose his job, fall ill or come under some other circumstance that makes it impossible to make payments on the loan. The Federal Trade Commission recommends asking the lender to notify you in writing of any late or missed payments.
No comments:
Post a Comment