Getting a loan can be difficult. After all, there is the risk of default, meaning that lenders want to reduce the chances of them losing their money. One of the most common ways for them to do so would be asking someone to cosign a loan. However, if you have been asked to cosign a loan, there are some things to know before cosigning a loan.
You Will Be Fully-Responsible For the Loan
Cosigners are considered to be fully responsible for the loan. As a result, you will be required to pay if the borrower becomes incapable of paying for whatever reason. For example, if they default, you will need to pay the outstanding balance. Similarly, if they die, you will need to pay the outstanding balance. In fact, if the lender sues over the matter, there is a real chance that they will sue you rather than the borrower if you are the one who has assets while the borrower does not.
You Need to Read the Loan Terms
Due to this, you need to read the terms of the loan that you have been asked to cosign with the same care that you read the terms of a loan that you have sought out on your own. After all, you are fully responsible, so you need to fully-inform yourself ahead of time. Even if you don’t want to scrutinize everything, you should at least scrutinize the section that is specifically addressed at the co-signer.
Cosigning Comes With No Ownership Rights
Be warned that cosigning a loan comes with no ownership rights over the property purchased using that loan. To name an example, if you have cosigned the mortgage for a house, you won’t get any claim on that house if you are asked to pay because the borrower has defaulted. Being a cosigner just means that you will be fully responsible for the outstanding balance if the borrower becomes incapable of paying for whatever reason.
Cosigning Comes With Consequences For Your Credit Score
You should know that cosigning comes with consequences for your credit score. This is because it will be treated as your loan from the very start, meaning that your credit score will be affected no matter what happens to the loan.
As such, you need to be very careful about cosigning a loan for someone who you believe to be unreliable about such matters. There are countless examples of cosigners whose credit scores were devastated when the borrowers defaulted on the cosigned loans without telling them.
There Isn’t Much Chance of You Being Released From Being a Cosigner
Theoretically speaking, it is possible for a cosigned loan to have an option for releasing a cosigner from their responsibilities. In practice, the chances of that happening aren’t very high.
This is because you need the agreement of both the lender and the borrower, which can be particularly problematic if you cosigning the loan was the reason that the loan went through in the first place.
You Will Want to Monitor the Loan
By this point, it should be clear that you will want to keep a watchful eye on the cosigned loan. This means remaining in touch with the borrower.
Furthermore, this means asking the lender to either send you the monthly statements or at least agree in writing to notify you about the borrower missing a payment as well as the loan terms changing. You should also be checking out your credit score report on a regular basis.
There are but some of the things to know before cosigning a loan. This is particularly true because some jurisdictions have more cosigner rights and protections than others. As a result, you need to inform yourself about them if you want to cosign a loan with minimal risk.