Co-Signing a Loan

People usually agree to co-sign a loan as a favor. But you should remember that co-signing a loan is a legally binding contract in which you agree to take full responsibility for the loan if the primary borrower does not pay.

Why Lenders Require Co-Signers: Before approving a loan, banks will review the borrower’s credit history, income data, and risk models to determine whether to approve the application. When a lender denies an applicant, it is because they think the applicant is likely to miss payments. By co-signing, you are telling the lender that you are willing to guarantee the loan if the borrower cannot.

Three Major Risks of Co-Signing:

• Full Legal Responsibility: If the borrower misses a payment, the lender can immediately demand payment from you. They are not required to pursue the borrower first.
• Credit Damage: Late or missed payments appear on your credit report as well as the borrower’s. Their mistakes directly lower your credit score.
• Reduced Borrowing Power: Even if payments are made on time, the entire loan appears as your debt. This can increase your debt-to-income ratio and make it harder to qualify for future loans, such as a mortgage.