Big purchase items like a car or a house require a credit check and, if someone’s credit is less than ideal, they are likely to be denied a loan for said purchase. That’s where a cosigner comes in. A cosigner is someone who has built up their credit score and has agreed to cosign a loan with a person whose credit still needs some work, and increases the likeliness of a loan approval.
Sounds like a really great gesture, right? It is. However, should the person with the lower credit score fail to fulfill payments, the loan then defaults to the cosigner, which ends up negatively impacting both credit scores.
Before agreeing to become a cosigner on a loan, we encourage you to ask yourself the following questions:
Do I fully understand what it means to be a cosigner?
When you cosign, you’re accepting responsibility for the loan should the other person default. Even if you have the slightest doubt on whether it’s a good idea for you and your credit, have a conversation with your personal Two Rivers Bank & Trust banker.
Am I able to fully pay the loan on my own?
According to an article from The Washington Post, 38 percent of cosigners had to pay some or all of the loan payments because the primary borrowers paid late or not at all. Are you financially stable enough to take on that responsibility? If the cosigner doesn’t have the funds to readily pay a loan, many people will put their personal property up as collateral – like their home. That’s something you could potentially lose should the loan fall back onto your lap as cosigner.
Why can’t the primary get a loan on their own?
If the primary borrower hasn’t made a lot of big purchases or ever owned a credit card, their score is likely low because they’ve simply not had the opportunity to build it up. But, if the primary borrower has a history of not making payments on time, or at all, and that’s resulted in their low credit score, that should raise some red flags.
Do I need to finance anything in the near future?
Once you are a cosigner you absorb that debt from the loan which raises your debt-to-income ratio. This makes it harder and less likely for you to be approved for a loan of your own, should you need it.
How much do I trust the primary borrower?
Cosigners are more often than not family or close friends to the primary borrower because it is such an important decision that should be taken seriously with only your closest confidants. Have a conversation with the primary borrower to set expectations and plot a roadmap for how this borrower-cosigner relationship will play out.
If you decide that cosigning a loan is the right choice for you and your finances, there can be a lot of benefits, too. Like, you’re helping the primary borrower’s chances of a loan approval, you’re helping them bulild their credit score and the loan may have a lower interest rate. Before jumping in, be sure to take your time, do your research and really weigh the pros and cons of whether or not cosigning is the right choice for you and the primary borrower.
Want to talk loans? Two Rivers Bank & Trust offers a wide range of loans with everything from personal and business to agricultural loans. Contact your neighborhood branch today to discuss which loan option works best for you!
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