You want to teach your teen about financial responsibility, and you’re not willing to just buy that special first car with no commitment. By buying their own car, your child can establish a good repayment history and be well on their way to a superior. credit score. However, if lenders are unwilling to lend your child money due to a lack of credit history, you may need to help out by co-signing the loan – but be aware of the responsibilities you take on. doing it.
When you co-sign a loan, you not only certify the principal borrower’s ability to repay, you also assume responsibility for repaying the loan as if you had taken it alone. You will need to attend loan closing and sign all necessary documents to take responsibility. Also, in most cases, you cannot opt out as a co-signer. You can ask the lender to write in the contract that your name will be removed after a certain number of timely payments, but he is unlikely to oblige you.
If the primary borrower stops making the scheduled monthly payments, you become responsible for those payments. As a co-signer, you should request that monthly statements be sent to you to verify that the primary borrower is making regular payments as scheduled. Check statements to verify that the correct amount of payment is made on time to avoid late fees at best and defaults at worst.
If you default on the loan, you are responsible for paying the balance to the lender; usually the lender has the right to repossess and/or sue you to recover the balance. The lender may also pursue the primary borrower, but the lender is more likely to target you, the one with (presumably) more money and assets. State laws vary regarding lawsuits against co-signers and repossession; check with your state attorney general’s office for details.
If the lender’s lawsuit against you is successful, other assets and income could be at risk. You could suffer a wage garnishment or have a lien placed on your home. The lawsuit settlement can also have difficult side effects – you will have to pay taxes on the part of the canceled debt as if you had received it as income.
The effect on your credit is also the same as if you had taken out the loan yourself. Missed or late payments and defaults will have a detrimental effect on your credit score. You can check your credit score and read your credit report for free in minutes using Credit Manager by MoneyTips.
Any loan you co-sign also appears as your personal debt on your credit report, increasing your debt-to-income ratio (DTI). Since this ratio represents 30% of your FICO credit score, expect your credit score to drop via a higher DTI. If you’re planning on applying for a new credit card or mortgage soon, the increased DTI could cost you a lot of money due to a higher interest rate – or result in an outright denial. . This is true even in the absence of missed payments or other missteps by the primary borrower.
The same cosigner responsibilities are shared regardless of your relationship with the cosigner and their credit history. If you are co-signing for someone who has a bad credit history instead of having none, keep in mind the additional risks involved.
There is actually no good financial reason to co-sign a loan; the only good reasons are of a personal nature. You have to decide if the personal rewards of helping someone are worth the individual financial risks. If so, do it, but get a copy of the statements and follow the payments carefully. Treat the loan as if it were your own, as it may end up being your loan.
If you are interested in a personal loan, visit our curated list of best lenders.
Photo ©iStockphoto.com/sturti