When a friend or relative approaches you with the opportunity to cosign on a loan, you may feel a variety of emotions. Whether you feel concerned, or excited to help a friend, there are many things you should know before you make this decision.
The truth of the matter is, although cosigning on a loan may seem like a good idea, it almost never is. For a cosigner, a loan is a risky choice with very little reward involved. The main reason a person requires a cosigner is because the lending institute deems them a high risk consumer and views them as unlikely to pay, which can potentially leave a cosigner in the position of being primarily responsible for repayment.
Here are a few things you should know before you even consider cosigning a loan to help out a friend or family member.
It’s a Risky Proposition
The first, and perhaps most important element of cosigning a loan is that it is extremely risky. When you get a loan for yourself the rewards often outweigh the risk, but when you cosign, the rewards are small, if there are any rewards at all.
Cosigning can have a positive effect on your credit if payments are made regularly, but the effect is minimal. If payments are not made, on the other hand, the hit on your credit will be much larger.
You are Responsible in the Eyes of the Lending Institute
Because the loan recipient could not have qualified for the loan without your signature, the lending institute will hold you primarily responsible for loan repayment. This means that if payments are not made, you will be contacted and targeted first for repayment.
It Can Have Serious Tax Repercussions
If the responsible party fails to pay back the loan and the Lender pursues action against you, they may choose to settle rather than suing. This may seem like a good thing, but the difference could be used against you as a debt forgiveness income.
This perceived income would have a profound negative effect on your tax return.
It Can Lead to a Chain of Suing
If the loan goes into default, the lending institute may then sue you as their first course of action. Although this may seem strange, you are seen as responsible (and capable of repaying) in the eyes of the Lender.
This means that you may need to file a second suit against the other responsible party. This can lead to huge fees and major inconvenience.
Cosigning a Loan Will Add Another Bill to Keep Track of
It is difficult enough to take care of your own bills and expenses, but when you cosign on a loan, you become responsible for tracking another persons’ bills.
It Can Potentially Damage Important Relationships
Not only does cosigning a loan have financial repercussions, it also can have a negative effect on your relationships. If things go wrong with the loan, you may have to face major issues with the other responsible party.
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