If you say no to cosigning, the person who needs help may feel that you’re the meanest person on the face of the earth. That’s okay - they’re entitled to their opinion. While I definitely understand how cosigning a loan can help someone with no credit history, I feel that the risks outweigh the benefits. Can’t decide whether to put your name on the dotted line? Here are seven reasons to say no to cosigning.
1. 100% Your Debt
Sign your name to another person’s loan application and you automatically inherit this debt. Even if you never make a loan payment, this debt is forever attached to your name, plus it’ll appear on your credit report. And if the primary signer stops paying, the lender will hound you for a payment. Do you need another reason to say no to cosigning?
2. Gambles with Your Credit Score
Taking out a new loan or acquiring a new credit card typically triggers a drop in credit score. Granted, this decrease is usually temporary, and you can regain lost points with good credit habits. But why risk your credit score for a loan that you don’t need, or want? If you’re in the process of building a stellar credit rating, don’t gamble with your score.
3. Late Payments Will Appear on Your Credit Report
Do you have a perfect payment record with your creditors? Cosign a loan for another person and you risk tarnishing your record. If the primary signer gets lazy and starts paying his or her bills late, this activity can appear on your credit report. Regardless of whether you’re the primary signer or the cosigner, a late payment can prevent your own financing.
4. Raises Your Debt to Income Ratio
Before approving any loan request, lenders check an applicant’s debt to income ratio. This is your percentage of debt in relation to your gross income. Cosigning a loan raises your debt to income ratio. If applying for a loan, a lender may feel that you can’t afford a new debt and reject your application.
5. Not Notified of Lateness
Cosigners aren’t usually made aware of problems with an account until it’s too late. The monthly statement for the loan isn’t delivered to you, and you probably won’t have access to the account online. Thus, you can’t monitor the primary signer’s activity. You have to trust that the primary signer will act responsibly and pay on time.
6. You Can’t Remove Your Name
Cosigning a loan is a done-deal. You can’t change your mind after a few months. Once you’ve signed your name, you’re attached to the loan until the primary signer pays off the debt. The only way to remove your name from a cosigned loan is for the primary signer to refinance the debt.
7. Damage Remains on Your Credit for Seven Years
If the primary signer stops paying the loan completely, and you can’t pick up the slack, this default appears on your credit report. In the case of an auto loan or mortgage, this can trigger a repossession or foreclosure. If this information is reported on your credit file, it remains for up to seven years.
Keep these things in mind when you're considering whether or not it's a good idea to cosign a loan for someone... has anyone ever asked you to cosign a loan? What decision did you make? How did you decide?