economy
Cosigning a loan: The risks oftentimes overlooked
From individuals with less-than-stellar credit scores to young adults with thin credit to otherwise responsible borrowers with piles of emergency debt, there are plenty of cases where one might benefit from a loan in a huge way—but don’t have the credit to qualify.
TL;DR
- Cosigning a loan means you are responsible for repayment if the primary borrower defaults.
- It requires a hard credit inquiry, which can temporarily lower your credit score.
- Cosigning increases your debt-to-income ratio, potentially hindering your ability to secure future loans.
- It is typically difficult or impossible to remove yourself as a cosigner before the loan is fully repaid.
- The primary borrower's bankruptcy does not absolve the cosigner of their responsibility.
- Lenders may pursue the cosigner for payment before the primary borrower.
- Cosigning can complicate personal relationships if the primary borrower falls behind on payments.
- Alternatives include helping the borrower build credit, offering a direct loan with a written agreement, or providing a cash gift.