You might feel bad for a friend or a family member who needs a little help getting a loan. "With your good credit," you are told, "you could co-sign for me and I could get the loan." While this might be a tempting way for you to be of use to someone you care about, co-signing a loan is very serious business. It is a financial decision that can affect your credit report and your financial situation. So, before agreeing to become a co-signer on someone else´s loan – anyone else´s loan – take some time to carefully consider whether or not it is a wise financial decision.
Giving out personal information
One of the biggest pitfalls of co-signing a loan involves the fact that you are giving out personal information. The person receiving the loan will have access to the application, and to all of the personal information, including address and Social Security number, that can be used to get credit using your name. Identity fraud has been perpetrated by children on their parents by such methods. No one likes to think that a close friend or family member would use your personal information to commit identity theft, but you should carefully consider this possibility and the likelihood before agreeing to co-sign on a loan.
Affects on your credit score
The whole point of having a co-signer is so that the borrower can get the loan. He or she is not creditworthy enough for the loan, so your good credit is used in order to help him or her secure the loan. This means that such loans are reflected on your credit report and can affect your credit score. When you co-sign on a loan, you agree to be responsible for it if the borrower defaults. This means that on your credit history, even though it shows up with a notation that you are a co-signer, you appear to be responsible for another loan. If it appears your potential obligations are too great, you may find yourself devoid of the ability to get a loan for what you would like.
A co-signed loan is your responsibility
You have to determine how likely the borrower is to pay off the loan, and make regular payments doing so. If the borrower defaults, the lending institution will come after you, and you will be required to pay back the loan. Plus, if the borrower is unable to make payments, but does not inform you, your credit score could take a serious beating before you even realize the problem. Carefully consider who you are co-signing a loan for, and consider whether or not he or she is really responsible. If the borrower does well, paying off the loan, his or her credit score will improve. However, if he or she has problems paying back the loan, it will reflect more negatively on you. Co-signing a loan should not be taken likely. It should be entered in with the same thought that you would give if you were actually borrowing and paying back all of the money yourself.