Cosigning a Loan or Asking Someone to?
Arm yourself with knowledge before hindsight leads you into saying could a, should a, would a, but didn’t. Statistically, there is a 50% to 75% chance you will be repaying the loan you cosigned yourself. Trust, understanding all the variables accompanied by clear communication is a great way to start off your new relationship as consignee and cosigner of the loan.
Asking Someone to Cosign a Loan? Keep these points in mind when you do.
Understand that you have a history with your credit that indicates that you require more support from someone who has a better credit report to add as insurance so your loan is approved. For our purpose today let’s call your perspective cosigner Bob.
Before asking your Bob to sign on the dotted line, be prepared first.
- Volunteer to show Bob your credit report, income statements & expenses or the fact that you have no credit at all.
- Have a game plan to show Bob how you will make your payments, then how you will start to pay him back after the loan is paid off.
- Know if you can re-negotiate the term of your lease to see if Bob can be taken off as your cosigner. Know if that is possible and how long it will take.
- Create an action plan for yourself. It should also indicate a form of increased earnings for your self.
Have as much information as possible for Bob since it’s your job to make him trust you with his credit. Explain to him that your credit rating is also at risk and is in his hands as well, since you both will suffer should either of you default or miss payments.
Considering Cosigning a Loan? Here are a few things to keep in mind.
Know what you are getting yourself into and explore all of the options available. Since you trust this person with your credit rating and financial future, make sure if they default you can cover the loan in full. Let’s use the name Sally for the person requesting you to be the cosigner.
There are a few questions to qualify Sally. Read them and make sure you Understand what you are entering into.
- Is Sally just starting out and needs help establishing credit? If so, are there other options such as a pre-paid credit card? This is the best scenario for you as the cosigner to entre into and studies have shown your risks are minimal.
- If Sally’s income requires you to sign due to insufficient cash flow, you should be careful. This is a bigger consideration to keep in mind. Is her debt to income ratio too high to support her request for a loan on her own earnings? Does Sally have a plan to increase her income in the future?
- Ask to have your responsibility limited to the value of the loan itself. Save yourself the collection fees and late charges if you can.
Understand what you are signing and know your options. Go into the agreement with the worst case scenario as a possibility; assume Sally defaults.
- Don’t jeopardize yourself, your credit and financial security if the worst-case scenario plays out and you end up paying the entire loan. Can you handle paying its entirety on your own?
- Debt collectors will be calling you in 3 months if Sally defaults. Be proactive and make sure you are notified in writing with every missing payment. In 3 months your loan has probably incurred fees for NSF checks, compound interest and more.
- If Sally is asking you to cosign for a large purchase such as a car, will she agree to put the title in your name until you are no longer a cosigner?
- Are you prepared to sue Sally? Is your relationship going to change?
- Get copies of all paperwork and ask every possible question, before you proceed. Leave no rock unturned.
Treat this like a marriage where full disclosure is a must on both sides. Go through all possibilities to make sure you both understand things clearly and the pros and cons of trust in cosigning the loan. Communication is the best form of making sure both parties know the covenant they are entering into.
For more valuable information, visit www.prudentcreditrepair.ca