Wednesday, April 25, 2012

Loan Cosigning: How does it affect me?

The Myth: If I cosign on someone’s loan, it won’t affect my credit.

The Facts: Cosigning on a loan can affect your credit. The way the cosigned person manages the loan will determine whether the affect of that loan will be positive or negative to your credit. Please keep in mind that when you cosign a loan you are now partnering with the other person on the loan. In the case of a car loan, if the cosigned person has a late payment, you have a late payment. If the cosigned person has a repossessed car, you have a repossessed car, too.

Are you Co-Signing for someone? 

It takes a brave person to cosign a loan as you are taking on a lot of responsibility. You are promising to be responsible for the payments of the loan should the person you are cosigning for not be able to pay. You are also doing the cosigned borrower a huge favor by letting them use your credit to upgrade their credit score.

Let’s think about some of the factors involved in cosigning a loan. Is there a right way to cosigning a loan?

There really is a right way and a wrong way to cosign a loan for someone. The number one thing to remember is to not allow emotion to cloud your judgment. Let me give you an example; I work with the women at a community Women’s Shelter. I met a young lady there who was burdened with a large debt because she cosigned for someone. That someone was her boyfriend whom she was very much in love with. She loved him so much that she cosigned a $35,000 loan for a slightly used Lexus. Within two months they had broken up and he had disappeared with the car. He stopped making payments and the vehicle was taken to another state. The lender was unable to locate the car for repossession. The debt has been placed on her credit as a collection for the $35,000 loan plus collection fees. All because she let emotions cloud her financial decision making.

We love our kids and we want to help them get established in the world of credit. Cosigning on a loan is a great way to teach your kids financial responsibility. It will help them start their credit file with solid information lenders want to see. Getting your kids started in credit correctly is one of the best gifts you could give to them.

I like to think we know our kids pretty well and can judge if they will be responsible enough to make all the payments on time. But it is also important not to burden them with a debt they cannot afford which can turn into a debt where you become ultimately responsible for it. We need to understand their income and expenses to be certain they can afford the payments. You are not a bank, but it is important to understand your child’s finances; perhaps they could create a budget plan for you. It can show how much they have coming in salary and what their basic expenses are going out. It gives you an opportunity to have a good conversation about making payments on time and the importance of building credit for their financial future.

One last thought, if your cosigned borrower makes all their payments on time and the loan pays off correctly at the end, your FICO/Credit Score will benefit along with that person who you cosigned for. Every payment they make on time benefits both of you. That’s a beautiful thing!

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