Co-signing a loan or a lease for a friend or relative isn't only a favor. As co-signer, you'll be responsible for payments on the loan if the person you sign for doesn’t pay. Pay attention to these tips and find out why the co-signer role shouldn't be taken lightly.
Typically young people who apply for a car loan, a rental contract, or even a credit card, need a cosigner to share the commitment with. This is a requirement that creditors usually ask for when the applicant has bad credit or no credit at all.
A cosigner is someone who has decent credit and is the banks' and landlords' backup in case the original signer doesn't make their payments on time. This said, if your friend doesn't have any regular income or a responsible attitude, the best advice is to deny your signature. If they fail to accept the given terms and conditions, you would have to afford the payments instead.
That will not only affect your budget but also your credit score, in a negative way. Your debt-to-income ratio will also increase. This means that the amount of money you'd owe is bigger than what you'd receive, which is a serious financial problem.
If the person you cosigned for stops making payments, the responsibility for cleaning the debt will fall on your shoulders. Since the original borrower likely won’t have the credit necessary to consolidate or refinance the loan themselves, you can try to do this for them.
Provided that you succeed in the negotiation, your friend could get a lower, more affordable monthly payment. You can also try and help your friend to find ways to catch up on their payments. As a last resort, you can opt to pay off the debt yourself and terminate the contract earlier.
This is something you can choose yo do if you know the impact will be lower than letting your friend pay off their debt. However, this solution has a double disadvantage: you'll have an unexpected expense that will affect your savings, and you won't know when you'll get your money back. Your trust in your friend will play a critical role!
Knowing all these risks, take your time and think thoughtfully before cosigning a loan or a contract. If any of these scenarios appear, you'll not only lose some money and put your credit history in danger, but it'll surely also affect your relationship.