Co-signing a loan is a common practice in the financial world. By cosigning a loan for someone with a poor credit score, you can boost their chances of availing credit from a financial institution. Helping someone get approval on their loan application just by cosigning can feel like a rewarding experience but it comes with a few risks.
What does cosigning a loan mean?
In a standard situation, when a person decides to apply for a loan, there is an agreement between the borrower and the financial institutions that states all the terms and conditions of the loan. When a loan is cosigned, the agreement is also signed by a third person known as the cosigner. This makes the cosigner equally responsible for the loan even if they’re not the one responsible for the EMI payments. Therefore, if you are looking forward to cosigning a loan for someone, it is essential that you carefully assess all the aspects related to it before making the final decision.
Some of the major downsides of cosigning a loan are mentioned below:
- By cosigning a loan, you would be responsible to repay the loan in case the primary borrower fails to do so.
- In case the borrower defaults on the loan, then your credit score will also take a significant drop. Additionally, delayed EMI payments by the borrower can also hamper your credit ratings.
- In case of a default, if the lender decides to file a suit for the loan, they might also sue the cosigner because of their higher credit score.
- One the loan has been approved, you cannot take your name off the loan agreement until the loan amount is entirely paid off.
Since cosigning a loan comes with a lot of risks, make sure that you know the borrower really well and find them trustworthy before agreeing to cosign a loan for them.
Before co-signing a loan, you should check if the borrower has a positive bank balance or has enough assets to repay the loan.
After cosigning a loan, you should always keep a check on your credit score to ensure that everything stays on track. Ensure that you get copies of the loan agreement after cosigning a loan. In addition to that, you can also request to obtain login credentials so that you are always aware of the status of debt payments. You should always have transparent communication with the borrower regarding their repayment strategy.
By taking all these precautionary measures, you can mitigate the risk associated with cosigning a loan.
However, it is advisable to review your budget and be prepared to make the payments in case the primary borrower fails to do so. In order to save your credit history from being affected, you will have to repay the loan amount by yourself.
Thus, make sure you know what you’re getting into before cosigning a loan. The decision to help someone avail a personal loan should be taken only after evaluating all the risk factors associated with it.