Someone Asks You to Cosign – What Do You Do?

A family member or friend reaches out, asking you to be a cosigner on a personal loan. Before you put your name down on that contract, you need to know what cosigning entails. It essentially makes you responsible for their debt if something prevents them from paying it on their own.

While you might trust your loved ones completely, financial good sense says you should weigh the pros and cons of this arrangement before you rush in to help.

Let this article be your guide to the big question of whether to be a cosigner. You’ll find everything you need to know if you’re up to the task.

What is a Cosigner?

A cosigner is someone who joins a personal loan application as a failsafe. They lend their good financial reputation, allowing the actual applicant to piggyback on their good credit score or low debt-to-income ratio.

Think of a cosigner as a backup payer to the official borrower. By signing on as a cosigner, this person agrees to pay for the loan in case the initial borrower can no longer make their payments.

A cosigner adds security to a lending situation from a lender’s perspective. Since the lender gains a backup payer in case of emergencies, they see the personal loan as less of a risk to provide.

Your signature does your loved one a huge favour because they may access better terms than if they attempted to borrow under their own steam.

What Does Cosigning Mean for You?

In a perfect world, cosigning won’t mean much other than paperwork. Your loved one will make their payments on time, so you won’t have to step in for them in an emergency. All you have to do is apply and potentially undergo a credit check as part of the underwriting process.

This new loan will appear up on your credit report, which may influence your debt-to-income ratio. However, prompt payments may also enter good entries into your file.

However, it’s important to understand what happens if your loved one faces hardship. Whether they bust their budget or lose their job — if something unexpected stops them from paying their bills on time, you may be called on to intercede.

That loan agreement you signed during the underwriting process makes you legally obligated to pay the loan. In the meantime, their delinquency may have a negative impact on your credit history. That’s because this personal loan will appear on your report, including any late payments.

And let’s face it — even though you agreed to help, you can feel pretty ticked off that you’re dealing with credit damage and extra bills because of your loved one.

What to Consider Before You Agree

Think things through before you commit. It can save everyone a lot of trouble.

Do You Know the Stats? According to NBC, nearly half (46%) of people who lent money to loved ones had a bad experience — 21% reported cosigning damaged the relationship, while 20% said it lowered their credit score.

Are You Prepared to Pay? Considering the worst-case scenario, you may have to pay for a loan you didn’t use. Can your budget handle this extra expense? Are you aware of what it may do to your credit score?

Are Your Finances Good Enough? A cosigner has to bring some financial stats to the table, like a good credit score and a low debt-to-income ratio.

How to Say No Tactfully

Considering your budget, credit, and relationship are on the line, you may feel like being a cosigner carries too much risk. That’s fair — you are allowed to say no, even to family.

Technically, you can say no and that’s it, although providing a justification may smooth things over. You can explain that you are working on your credit score so that you can borrow money in the future. Alternatively, you can let them know you already have enough on your plate and can’t pitch in that way.

You can offer to help them in other ways, like shopping around for rates from an online lender like Fora. Exploring what a Fora Credit line of credit offers is easy from the comfort of your own home. You can track down need-to-know qualification requirements and loan details before comparing them to other online options.

Rate shopping can be overwhelming for someone who needs money in an emergency, so your help here will likely be appreciated. Having a second person who will search for rates and compare options with them can be a huge help. It also shows your loved one they have your moral support, if not your outright financial support.

How to Say Yes Responsibly

Let’s say you’re in the financial position to handle this responsibility, and you accept the risk of becoming a cosigner.

Before you agree completely, talk to your loved one about the situation. Many personal loans between families sour relationships because too much gets left unsaid, causing each party to have different expectations. By talking freely about finances, you can make sure you’re both on the same page about this situation.

During your conversation, you need to underscore the risk you take as a cosigner, and why it’s important they always pay their bills on time. You can discuss how they intend to hit these payments without fail, talking about budgeting methods and sacrificing splurge spending.

You also have to come to turns that something might interfere with your loved one’s budget. They can have a perfectly balanced spending plan that covers their loan payments when their car dies, their furnace stops working, or they lose their job. These emergencies are out of their hands, and they can make it hard or impossible to pay bills on time.

Preparing for this possibility can take some of the sting out of taking on this new obligation. It can also help you conceptualize how your loved one didn’t drop the ball on purpose to spite you.

The Takeaway:

Cosigning a loan is a big decision that you shouldn’t take lightly; it can have a big impact on your finances. Use what you learned here today to determine if it’s something you can handle.