Cosigning on loans a common practice, but it may leave you feeling vulnerable. What if the person taking out the loan defaults? What options do you have if you’re unable to pay? Therefore, finding a cosigner can be tough. You can find advice if you don’t have a cosigner by browsing various websites online. Cosigning on loan can be safe and helpful for both of you if you take some steps to get off on the right foot.
Beginner’s Guide To Co-Signing A Loan
The right conversation
The first thing you should do when you are being approached about cosigning on loan is to have a candid conversation with whoever is approaching you. Having a conversation about where you are financially and ensuring that the person you are helping is in a solid financial situation is critical to success before you begin. It is also essential that you speak with the primary borrower to learn what the monthly payments are and what financial institution he or she is borrowing from.
What co-signing means
First, that if you cosign you agree to be responsible for the entire loan as if it were your loan. However, unlike your loan, you will most likely not be notified if the primary borrower has paid late for several months. Should the main borrower be irresponsible or uncommunicative this can hurt your credit score? On the flip side of that, if the principal borrower is responsible and communicates to you effectively then this can help your credit score. Either way, open lines of communication are essential.
The effect of co-signing on your credit history
Second, even if the primary borrower is paying on time the loan is included in your credit history as debt that you have accrued. This can negatively affect you if you choose to seek a loan during the repayment period. If you’re looking to take out a major loan an auto loan or mortgage are good examples cosigning may not be for you.
Third, several things are within your rights to ask for as a cosigner on loan. You can ask the lender to guarantee in writing that you’ll be notified immediately if there’s a late or non-existent payment. While the lender is not legally obligated to give these to you, you should also ask for a copy of the loan contract, the Truth-in-Lending Disclosure Statement, and any applicable warranties. If the lender does not provide them, ensure that the primary borrower provides them to you. Remember, you’re doing this person a favor, and you have the right to know everything about the debt that you are acquiring.
While cosigning on loan, it can be beneficial to you, and to the primary borrower, it is important to approach such an arrangement with some caution. Ensure that the principal borrower knows of his or her rights and responsibilities and educates yourself as well. You have the right to view what you are signing and to get information from the financial institution of the primary borrower regarding the loan.