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Thinking About Cosigning a Loan? Read this First!
Are you wondering if cosigning will hurt your credit? Well, if you’ve never cosigned a loan, you’re probably wondering what this would mean for you. If you’re contemplating doing this as a favor for someone, arm yourself with the knowledge to avoid a worst-case scenario.
If someone’s credit score is less than what’s needed to qualify for the loan or purchase and you are obligated to help, just be prepared for what this means. When an individual or business owner who lacks a suitable credit score wishes to borrow money to pay for a car, house or other investment, their lender may require them to find someone who can guarantee their loan. This person is known as a “co-signer.” Although the primary borrower is responsible for paying the loan’s installments, the co-signer is legally obligated to cover the loan’s balance in the event that the primary borrower becomes unable to do so.
To Sign or Not to Sign?
We can’t tell you what to do of course. If we were to be candid the answer would be no. But since there is a story behind every decision, risky or not, it’s best to know what cosigning means. You should also know that even if the borrower pays the loan on time, there is a chance that the added debt may negatively impact your credit rating. On the flip side, however, you may find yourself with a greater range of credit accounts.
Pitfalls and Precautions
Before agreeing to co-sign a loan, you should make sure that your budget has plenty of room for the added burden. And while most cosigned loans don’t revert to the co-signer, you should mentally prepare for this eventuality. Only cosign for family members or close friends that are trustworthy. Additionally, you should build up a store of emergency savings to ensure that you don’t have to make sacrifices to pay off the loan’s balance. You may wish to make a written arrangement with the primary borrower to ensure that you’re reimbursed for any expenses related to his or her default.
Manage Your Credit
The cosigned account will affect your credit, so stay ahead of the game by monitoring your credit score and any changes to your report with CreditGUARD of America’s Credit Messenger™ program.