Loans: To Cosign or Not Cosign? Read This First!
We all want to be kind, generous and helpful when our loved ones are in need. But there are four giant reasons why you should say “No” if asked. If you don’t know what these four are, don’t answer that request until you’ve carefully reviewed the following information.
If a borrower has bad credit or no credit history they likely won’t be able to qualify for a loan with most lenders. One option the borrower has in this case is to take on a cosigner. The lender uses the cosigner’s credit score to help qualify the loan. The cosigner is considered the guarantor for the loan.
If you’re asked to cosign a loan, it could adversely affect you in the following 4 ways:
- Your ability to qualify for a loan.
Banks and lenders treat the loan as if you had borrowed the money yourself. Even if the borrower makes their payments on time, having the debt on your record may adversely affect your ability to get a loan. For example, if you would normally qualify for a $400,000 mortgage, the bank may only offer you a loan qualification of only $300,000 if you have already cosigned on a $100,000 loan. Or you could be denied a loan altogether if you debt-to-income ratio is too high. It doesn’t even matter if you have perfect credit scores.
- Your cash flow.
If the borrower fails to make their payments, the lender will expect you to pay everything—the original principle, interest, late fees, collection fees, or anything else that applies. According to the Federal Trade Commission, three out of four cosigners are asked to pay when the borrower defaults! This statistic shouldn’t surprise you—remember, if the borrower needs a cosigner, it’s because they’re already considered a high risk investment! In most states, the lender can come straight to you instead of asking the borrower first. This may expose you to phone calls from collection agencies, lawsuits or even garnishment of your wages.
- Your credit score.
If the borrower fails to make their payments, your credit score could likely be harmed in the process.
- Your relationship with the borrower.
Cosigners usually pledge for family members or close friends. Needless to say, if the borrower fails to pay, your relationship with that person could be irreparably harmed. It’s probably not worth the risk. If the person is close and truly in need, then simply give/gift them the money, with no expectations of it being paid back.
So, what can you do instead of cosigning? Here are a few ideas:
- Give them the money as a gift. The chances are good that you’ll end up paying for it anyway!
- Loan them the money yourself—with the knowledge that they may not be able to repay it all or repay it consistently. However, the one advantage to this is that your credit rating is not at risk. If you can’t give them the full amount needed, see if they can obtain a smaller loan on their own and help them out with the difference. Or consider giving them a little as seed capital or a down payment and work with them to put a budget or savings plan together for the future.
- Direct them to look into alternative lending options, such as short term loans, which do not require a credit history check, verifications of income, employment, or banking accounts. If done responsibly, this may help them improve their credit rating at the same.
- Help them to improve their credit rating so that they can get the loan without a co-signer. You obviously have been doing something right so provide some guidance and non-monetary assistance:
- Offer resources and advice on ways to improve their credit score.
- If you are an employer, explore hiring them. If they already work for you, see if there is room for a raise. If neither, get creative and use your connections or resources to help them find a job or a better job.
- Help them reduce their expenses, by looking at their spending/bills and working on a budget.
For more information on alternative lending options, please call Coastal Title Loans & Finance, LLC at 714-701-8555, or visit www.CoastalTitleLoans.com.