Why you should not, in the best of situations, cosign on another’s loan application.
It could be a credit card for a girlfriend or a loan for a loved one. It may even be your own family where your child or a spouse may want you to help them get a credit card. Because you love the person and trust them you may be inclined to offer your signature without realizing the responsibility that you are taking. Before you cosign on an application that someone else make sure you understand all the reasons why you should never cosign for others.
The number one thing that you should understand is that there is a reason why the other person cannot get approved for credit on its own. The lack of credit history or presence of make a credit information may be preventing him from getting qualify for credit on his own. This means that the lender is not consider the person responsible enough to qualify for credit individually. If the creditor having used the tools and resources available to him for predicting the creditworthiness of a person has determined that the person is a high-risk the maybe you should give yourself a pause to consider the same thing. If a creditor does not think that your loved one will pay on time, they require a cosigner. A decision that a lender usually makes for the consumer is based solely on facts and data that he has access to. This usually comes from the credit report of the applicant and the documents that applicant provides such as proof of income, employment, residential status etc.
This means that your loved one could very well lose control of his debt situation in the future and leave you responsible for the money that he or she has spent.
Whenever you cosign on a loan application you are just as responsible for the debt as you the person. You are also completely responsible for the whole amount. Many people think that the burden of the debt is broken up into two parts since there are two people on the credit card account. But the truth is that each single person is completely responsible towards making the complete payment. If your loved one is late in making the payments then it’s the same as you’ve been late on the payment and the same gets reported on the credit file of both the people. This will damage your credit score. Your debts to income ratio will also increase which will hinder your ability to get a loan free yourself in the future if and when the need arises.
In case of the account getting sold to a collection agency, the collection agency is in their right to try recovering the money from either of the joint account holder. They are not mandated by the law to try and recover the money from the family account holder. They can and may try and recover the money from the cosigner witches you because you were the one with the better credit rating and hence a better bet for a successful recovery. You can also be sued in a court of law where a judgment entered against you will not only require you to pay the debt but also be recorded on the credit report which is one of the worst entries that can find their way on your credit file. If your loved one happens to bankrupt the debt he or she will be let off the hook for it. You one the other hand will be solely responsible for paying the debt.
This does not mean that the person who is asking for your help in cosigning for the reputation is doing it with the intention of seeing the payments in the future. But there are risks involved with cosigning on an application and doing it for a person who is unable to qualify for credit on their own is something that you should think about carefully.
If the person involved is the near and dear friend or family then perhaps it would be better if you help the person develop good spending habits and build a good credit score so that they can qualify for credit on their own.
You may be thinking that you are doing a good deed by helping someone out get credit at any or building a good credit history. Do not do it because it could result in big financial problems for you.
It is a common scenario where a parent, partner or ex-spouse than ends up with a large amount of debt from their Child, partner or ex-spouse respectively. It’s one thing finding yourself under debt due to your own credit mismanagement but it is doubly worse when it is somebody else’s debt and you are fully responsible for the payment. For those of you who are contemplating the thought of helping out a partner, parent or sibling or child by cosigning on the loan do not to do it as adding your name to somebody else’s loan is a very serious matter. Tying your own financial history to a natural history of someone else is a serious decision and could end up in a financial disaster for you ought of no-fault of your own except for the fact that you did not think through the decision of cosigning for someone else.
Cosigning on somebody else’s loan makes you fully responsible for the entire amount of the loan. The bank or the creditor is free to try recovery from either of the cosigners and with whom they feel they have a greater chance of success in getting the money back.
This means that even though you are a cosigner, you may be the one with the shining credit history and in the lender’s eye, more liable to pay the debt rather than the primary applicant.
The very fact that a lender needed a cosigner in the first place is a sign that they do not think that the primary applicant is a good enough credit risk.
When parents co-sign for their children and then the child happens to default, the lender is aware of the fact that the defaulter may not care much about the dent on his credit rating. He/she is young and does not much credit history to start with. Young people find it easier to ignore credit rating issues simply because they do not give it much of a thought or think that they will have plenty of opportunity to build it in the future.
However, the parents are probably more serious about their credit rating since several of their financial affairs may depend on it like, credit card rates, insurance premiums, future plans for a personal loan, mortgage or auto loan. Therefore, the lender might just prefer to collect the debt from the parents simply because he thinks that they are more liable to pay up to avoid the negative mark against their credit file.
It is also easier to track and communicate with the parents since they are the ones who are in all likelihood settled down in a home. The kids can be harder to track when in college and soon after as they are likely to be moving to different places.
When you cosign for the person you are putting your credit rating at risk. You are signing a legal contract that holds you completely responsible for the entire debt. If there is a delinquency on the debt most of the cosigner’s do not learn about it till it’s very late. By the time a cosigner finds out about the defaulting primary for the debt is already many months late and has been reported to the credit bureau. A delinquent or a charged off account on a credit report is of the worst entries that can be present. Apart from that the bank can also sue you in a court of law where it can force the sale of your assets such as your house in order to recover the money of the loan. Most of the legal documents and agreements offer loans also allow the bank to charge you its own legal fees in collecting the debt from you.
Most of the time the terms and conditions of a loan is printed in very fine rent. Most of the people will sign the document without reading it. The truth is that while people resume that the lender will only come after the cosigner once they have exhausted and failed in every means of collecting from the primary borrower, the truth is that the lender will come after whoever it feels it has the best chance to recover from. And since you are the person with the better credit rating who cosigners are guaranteed, the lender may decide to come after you without even trying to recover the money from the primary lender first.
Another effect of cosigning for a loan is that it increases your debt to income ratio. Lenders look at the debt to income ratio before approving any further loan to the consumer. It is possible that since your debt to income ratio is already high due to the loan that you co-signed on someone else your own loan application may get denied in the future.
If you’re already stuck with someone else’s debt you may have no other option but to pay it off. What you can do is try and negotiate with the creditor or the credit card company. Most of the consumers do not know and understand that you can negotiate with credit card companies to agree on how much you will pay. You can reduce the payment for the given debt to 75 or even 50%. Settling the debt with the creditor will probably not clean up your credit history completely but having a settled and paid off status on an account is better than a charged off account. You will also be able to get rid of the collection agency who might be trying to recover the debt from you.
If you are planning to cosign on a credit card for your teenage child in order to help them get the first credit card and build credit history and make sure to provide them with adequate credit education. High school seniors and College students are bombarded with credit card offers. Since an average adult already has plenty of credit cards teenagers, high school seniors and College students comprised the untapped market. The credit card companies love students because they figure that they are a good risk because parents stand behind their debt. Students that are absorbed by a credit card company into using their credit card earlier on also tend to make loyal customers for the future as well. And