If you co-sign a friend's loan and he misses a single loan payment deadline, your credit score could drop. If that happens, it might be harder for you to buy a house or get a low-interest rate on a loan in the future. If your friend fails to pay back whatever he owes, the lender might sue you first.
Co signing is a terrible idea, unless you have lots of money and can assume the loan . The lender doesn't feel the borrower is a safe risk for them, so that should be your best indicator. If your friend doesn't pay- you have to. It will affect your credit rating and ability to borrow- it's as if it's your loan.
Co-signing a loan comes with significant risks. As a co-signer, you're legally responsible for the loan if the primary borrower can't make the repayments. This can affect your credit scores, increase your debt-to-income ratio and potentially lead to legal action if the loan isn't repaid.
Your best option to get your name off a large cosigned loan is to have the person who's using the money refinance the loan without your name on the new loan. Another option is to help the borrower improve their credit history. You can ask the person using the money to make extra payments to pay off the loan faster.
You may have to pay up to the full amount of the debt if the borrower does not pay. You may also have to pay late fees or collection costs, which increase this amount. The creditor can collect this debt from you without first trying to collect from the borrower.
Proverbs 17:18 “One who lacks sense gives a pledge and puts up security in the presence of his neighbor.” The Bible is pretty clear that co-signing a loan is not a good idea.
If it's too hard to say no to a co-signing request, you can say your financial planner advised against it. (Your "financial planner" can be a book, an article, yourself or a financial professional; the good ones all say it's dangerous.) Finding an alternative to co-signing may be better for both parties.
A cosigner might help: Get a reduced security deposit on an apartment lease. Get a lower interest rate and lower monthly payment on a loan for a car. Secure a mortgage with a lower interest rate.
Co-signers agree to be held legally responsible for a debt should the primary borrower fall behind on what they owe. A co-signed debt also appears on the co-signer's credit reports and may influence their credit scores as if the debt were their own.
A co-signer only has responsibility for the loan. The lender will contact you if there are late payments or the primary borrower defaults. Since a co-signer essentially acts as a guarantor for the primary borrower, you must pay the loan if the primary borrower is unable to. But that has no impact on your insurance.
Late or missed payments can cause your credit score to decline. The impact can vary depending on your credit score — the higher your score, the more likely you are to see a steep drop.
A borrower with a poor credit history or negative financial situations, such as bankruptcies or repossessions, will have a harder time getting approved for a loan—even with a good co-signer.
The lender may take legal action against you, pursue you through debt collection agencies, or sell the debt to a “debt buyer” to try to collect the money that is owed on the loan if the borrower does not pay or defaults on his or her repayment obligations.
The long-term risk of co-signing a loan for your loved one is that you may be rejected for credit when you want it. A potential creditor will factor in the co-signed loan to calculate your total debt levels and may decide it's too risky to extend you more credit.
Request release from a co-signed loan
Co-signers can make a written request to the lender to be released from a loan. In certain cases, like some student loans, there may be a provision that allows a co-signer to take their name off a loan.
Co-signing a credit card for a friend or family member is a big leap to take and one that could hurt your credit score if the person you sign with doesn't pay the card payments on time.
God's view of consigning or guaranteeing a debt
Although the Bible doesn't specifically use the word "cosign(ing)," it definitely addresses the topic and instructs us against doing it. In the book of Proverbs, a book of wisdom, we find several passages that provide the perspective God has on this practice.
In fact, studies of certain types of lenders show that - for cosigned loans that go into default - as many as three out of four cosigners are asked to repay the loan. Your credit rating could be damaged. If the lender sues and wins, your wages and property may be subject to garnishment or other collection actions.
A cosigned loan could weigh quite heavily on both your combined credit histories. That means if your payments are late, they adversely affect both of your scores instead of just one, and if you default on the loan altogether, both of your credit scores could be affected.
Although requirements can vary by lender, a cosigner typically needs to have good to excellent credit (670 and up) to cosign a loan or credit line. Lenders look at a cosigner's credit score and report as well as their income and assets to determine whether they qualify for a loan.
But most states allow cosigners to take primary borrowers to court in the following situations: Cross claims: If you default on or fail to repay the loan, the lender could sue the cosigner for the money owed. The cosigner may then be able to sue you for the money that the lender is trying to recover.
While you can often use one loan to pay off another, be sure to read the fine print of your contract first and be wise about your spending habits.