Getting approved for a loan can be an uphill climb for borrowers who don’t have the best credit rating. If a lender sees a low credit score, they may be reluctant to green light a loan without having a cosigner on board.
If a friend or family asks you to cosign for a personal loan, car loan or student loan, you may not think it’s that big of a deal but you’re wrong. Co-signing can have some serious financial implications that you should be aware of before you sign your X on the dotted line. If you’re entertaining the idea of becoming a cosigner, here are some import ant realities that you need to understand first.
Reality #1: Cosigning makes you responsible for the debt
One misconception that people tend to have about cosigning is that if they’re not the one using the loan funds, then they’re not the one who’s on the hook for repaying the money. The truth is, when you cosign on a loan or any type of credit for that matter, you’re agreeing to share the responsibility of paying back the associated debt. Essentially, cosigning in the eyes of the lender is the same as taking out the loan yourself.
So what does that mean from a legal perspective? If your cosigner agrees to make the payments but they end up defaulting on the loan, (meaning they don’t pay) the lender can initiate collection actions against both of you to recover what’s owed. Even though you may have had nothing to do with the loan since signing the paperwork, you could become the target of phone calls or letters asking you to pay up.
If your cosigner doesn’t make an attempt to honor their obligation to the lender, the lender can up the ante with a civil lawsuit. The lender can sue both you and the person who asked you to cosign for the outstanding loan balance, plus any late fees or interest charges that have accrued since they defaulted. They can also ask the court to make you pay their attorney’s fees. If the lender successfully proves their case, they can move on to the next step: garnishing your wages or your bank account.
At the end of the day, you could end up on the losing end of a court judgment just for putting your signature on a loan for someone else. While you may have thought you were helping the other person out, you were really just creating financial trouble for yourself.
Reality #2: Cosigning can affect your credit
Cosigning on a loan can impact your credit in a few different ways. First, the lender will have to pull your credit report as part of the loan application process. Hard credit pulls show up on your credit report. Inquiries for new credit count towards your credit score calculation and each inquiry can trim a few points off your score.