When someone asks you to co-sign a loan, it can be an incredibly difficult decision to make. On the one hand, you may want to help out a friend or loved one in a time of need. And you can also enjoy various auto finance deals when it comes to co-signing a car loan. But on the other hand, you could be putting yourself at risk if things go wrong. You’ve probably heard the horror stories of people who co-signed a loan and then found themselves on the hook for payments they couldn’t afford when the primary borrower stopped making payments. If you’re thinking about co-signing a loan, don’t do it. Here is why you should never co-sign a loan.
Co-Signing a Loan Is Legally Binding
When you co-sign a loan, you are legally liable for making the payments if the primary borrower fails to do so. Your credit score can be negatively affected, and you may even face legal consequences. In fact, you can get sued and have your wages garnished if you fail to make payments on a co-signed loan. Not only could this cause financial strain, but it could also damage your personal relationships.
Your Credit Score Is at Risk
Your credit score can be adversely affected if the main borrower doesn’t make any payments on a co-signed loan. Missed or late payments will appear on your and the primary borrower’s credit reports, hurting your financial standing. Many co-signers also have to make payments for missed or late payments, further damaging their credit score. A study by the Federal Reserve Board also found that co-signers are more likely to have delinquencies on their credit reports compared to non-co-signers.
Co-Signing a Loan Can Limit Your Ability to Get Future Loans
When you co-sign a loan, it will appear on your credit report as though you are the primary borrower. This can limit your ability to take out future loans or make large purchases, as lenders may see that you already have significant debt. Additionally, if the primary borrower is not making payments in a timely manner, it may make it more difficult for you to get future loans.
Getting Out of a Co-Signed Loan Agreement Is Not Easy
You may think that the horrors mentioned above are temporary and that you can always get out of a co-signed loan agreement if things go south. However, getting out of a co-signed loan agreement is not easy. It may require legal action or for the primary borrower to refinance the loan in their own name. In either case, it can be a long and challenging process that could damage your personal and financial standing.
In conclusion, co-signing a loan may seem like a good idea at the time, but it can have long-lasting and damaging consequences. It’s best to avoid co-signing a loan altogether and find alternative ways to support your friends or loved ones in need. Remember, if they cannot qualify for the loan on their own, it may not be a wise financial decision for them to take on the loan in the first place. Protect yourself and always say no to co-signing a loan.