Cosigning a Loan – Understanding the Reasons & Risks

Cosigning a loan is one of the benefits of having a high credit score. It allows you the opportunity to help out another person financially. But you need to consider the risks and figure out if cosigning a loan is the right choice for you. Some of the reasons and risks associated with cosigning a loan are as follows:

Reasons to Cosign a Loan

  1. It Helps an Applicant Build Credit 

It’s normal for people to need to take out loans for a new vehicle, or college. If you take the opportunity for a loan away, options become scarce. As a cosigner, you can help another person have the opportunity to build a better credit score.

  1. It Helps an Applicant Receive Financing Options 

Taking the chance and cosigning can give others opportunities for transportation or education. In fact, taking out a loan for a new car or college is pretty normal. Sometimes creditors and lenders will reconsider applications on behalf of a consigner. 

Reasons to Rethink Cosigning a Loan

  1. It Increases Your Debt-to-Income Ratio

Just like any other activity, cosigning also comes with certain risks. Cosigning can badly impact your debt to income ratio in the long run. For instance, if the borrower is unable to pay off the debt within the due time, then you will be held responsible for paying for it.

  1. You Will Be Stuck As Cosigner

Cosigning isn’t something you commit to for a few months. Once you become the primary cosigner, you are stuck as the cosigner until the debt is paid. 

  1. You Can Destroy Your Credit

There’s nothing wrong with helping out another person with financing. However, if this person has a history of late payments or defaulting on loans, proceed with caution. Any financial mistakes will be noted on your own account and can greatly affect your credit score.

The Takeaway

Cosigning is a personal preference. It can be a great way to help your own child become financially independent faster. Just remember that any negative actions on the loan account will affect you. Don’t make financial decisions based on pure emotions, but don’t be too cautious if your own account is in good standing.