Why Co-Signing a Loan Is a Big Responsibility
A seasoned financial advisor Rockville MD clients recommend understands that many of us have family or friends with less-than-perfect credit scores who are unable to obtain a loan based on their own credit history. It is not uncommon for financial institutions to offer customers the opportunity to obtain a loan if they have a co-signer on the loan.
As a financial advisor Rockville MD provides can explain, when you agree to co-sign someone’s loan, it is just as if you are taking the loan out yourself. You become just as responsible for the borrowed money as the person you are co-signing with. In other words, you are agreeing to be responsible for paying back any remaining debt if that person defaults on that loan.
A financial advisor Rockville MD residents trust may tell you that it’s common to feel pressured or responsible to co-sign for someone if you’re asked. You may feel like there is no risk to you and agree quickly, but you should know that this may be is a major financial decision and it may have the power to change your life. Before you agree to co-sign for someone else, you may want to contact a financial advisor in Rockville MD to learn the risks.
There May Be Risks in Co-Signing a Loan
Any financial advisor Rockville MD offers may tell you that the most important responsibility you take on when co-signing is opening yourself up to assume the debt. A co-signer may be taking all of the risks of the loan with none of the benefits. Co-signing it is essentially an agreement to pay if the co-applicant doesn’t.
It’s also important to remember that you can’t control the person for whom you are co-signing. If they default on the loan or fall behind on payments, you may be held responsible by the creditor.
An experienced financial advisor in Rockville MD may explain other risks that can be involved when you decide to co-sign a loan for someone. These risks can include:
- Your credit may be damaged if the person you are co-signing for does not make loan payments as agreed to per the terms of the loan. If they fail to make payments on time or fail to make payments at all, the financial institute who holds the loan will report this negative credit activity and it will be reflected on your credit history, likely affecting your credit score.
- If you do decide to co-sign a loan, a financial advisor Rockville MD clients rely on knows that once you co-sign, you cannot remove your name from the loan. You are legally bound to the loan until the debt is fully paid off.
- The amount of the loan may affect your debt-to-income ratio. As a financial advisor Rockville MD residents call might explain, in the event you need to borrow money or apply for any kind of credit for yourself, the loan you co-signed for will be reflected in the amount of debt you have. This could result in not being able to obtain additional credit.
- You may face legal judgments if the loan defaults. If the funds are not paid, the financial institution may take legal action against you. If they are successful in their action, the courts may allow them to garnish your wages, place liens on your property, and even seize funds from your bank accounts.
You May Be Liable
Your Rockville MD financial advisor may warn you that by co-signing, you’re telling the creditor that you trust this person and that you agree to be responsible for the loan if necessary. This means you may be held liable should the person not make payments.
You are doing more than just taking on the responsibility; you may be held liable if the person defaults on the loan. Some creditors may seek additional damages against you for having vouched for someone who isn’t financially responsible.
You’re Helping the Credit Score of the Applicant
Your financial advisor Rockville MD residents turn to may tell you that when you co-sign a loan, you are helping the applicant build their credit. Your own credit score won’t improve due to the payments, but it could be negatively impacted if payments aren’t made or if payments are made late.
Of course, helping the credit score of another person may be less of a risk and more of a benevolent choice. Parents or grandparents, for example, might choose to help a child who hasn’t built up a strong credit score but wishes to take out a loan. Speaking with a financial advisor Rockville MD residents rely on may help you determine if co-signing is a wise choice in this situation.
You’re Making a Guarantee
By co-signing, you promise that payments will happen even if you have to pay them. The lender may not care why the primary applicant stopped paying and may not be lenient on you just because the loan isn’t actually yours. Your signature guarantees that payments will be made.
Are There Other Options to Co-Signing?
Although you may want to help your friend or family member obtain the funds they need, a professional financial advisor Rockville MD provides may recommend considering other ways to assist your loved one. One way is by helping them with an initial down payment. Depending on their financial situation, having a larger down payment may result in lower monthly loan payments. This could enable them to qualify for the loan without needing a co-signer.
Another option your Rockville financial advisor may be able to assist you with – and depending on your financial situation – is loaning the money directly to your loved one instead of being a co-signer. Although you might still encounter a defaulted loan or late payments, a private loan will have no effect on your own credit history or credit score.
Contact a Financial Advisor Rockville MD Trusts Today
Be sure you take the time to understand what co-signing really means and what responsibilities you have now and in the future. It can be a smart choice for some individuals, but it is not always the best choice in all situations. It may be in your best interest to call a financial advisor Rockville MD residents trust to help you decide if co-signing is a smart decision in your specific situation.