If your loved one has a history of late or missed payments, they may have difficulty getting approved for a loan and ask you to co-sign for them. Although banks prefer not to approve loan applications from these types of borrowers, these applications can nevertheless succeed if the applicant can find a co-signer with a strong credit history. Here are a few things you should consider before signing on the dotted line if a loved one asks for your assistance in obtaining a loan in order to get out of a financial bind.
What do you mean by Co-signing a Loan Agreement?
Because they don't meet the requirements or don't have the credit to qualify for the loan, your loved one requires you to co-sign for them. In such circumstances, the lender declines to grant them a loan and demands a co-signer as security.
Being a co-applicant for a loan differs from co-signing a loan agreement because a co-signer does not submit an application for the loan. A co-signer essentially ensures that he or she will repay the loan if the primary borrower cannot do so and helps the primary applicant get authorised for a loan.
Few things you must remember before co-signing a loan
Your credit rating can be affected
There are hazards associated with co-signing a loan agreement. First, there is a potential that your CIBIL score will be affected if the co-signed borrower does not return the loan in accordance with the terms. This is due to the fact that your creditworthiness may be impacted, as well as the credit score of the primary borrower.
Another possibility is that the principal borrower misses a payment on the loan; since you are the guarantor, the credit bureau will be notified, which will once more impact your CIBIL.
You Won't Benefit From The Loan
If you co-sign a loan, your loved one will truly benefit from it because they will live in the house, drive the car, and so on. But, on the other hand, the loan amount won't be available to you, and you won't be able to use it. In addition, having this loan on your account could raise your credit score if the loan payments are made on time. But your credit score usually doesn't require much care if you can be approved as a co-signer. So, the risk is not justified.
You are liable for repayment.
While co-signing a loan, you agree to repay the loan if your relative or friend is unable to do so or misses any instalments. In fact, your loved one might still be able to avoid responsibility by filing for bankruptcy, but the lender will pursue you for the loan's payback. If your loved one is exempted, you will be solely responsible for repaying the debt, and you risk being sued for it and having a negative notation made about you on your credit report. A negative entry on your credit report might not be removed for years.
The state of your personal relationship could deteriorate
You might find this unusual, yet things can go wrong and ruin a personal relationship. This can occur if the primary borrower—a friend or family member—cannot pay back the loan. You are the person the lender comes after in this situation. You are the one who made it possible for the defaulter to initially obtain the loan because you co-signed for it. In this situation, there is a potential that you and the borrower would argue; in the worst scenario, this could ruin your relationship.
When Is It Appropriate to Co-Sign a Loan Document?
When you are certain that you will repay the debt
It's quite clear you know someone well when they ask you to co-sign for a personal loan. But before you co-sign the loan, it's crucial to understand the borrower's financial situation and to find out about his repayment intentions. Then, you can co-sign the loan agreement without a second thought if you are confident that the borrower will repay the amount in full and without any defaults.
If you're willing to take the risk
Only if you believe you can afford the risks should you accept to co-sign for someone else's debt. As was said above, some dangers are associated with co-signing a loan, but if you feel like you can manage them, go ahead and sign it.
However, remember that even if you might be able to take the risk right now, you'll also need to be ready to handle losses along the road.
Consider the benefits and drawbacks before signing up. There may come a time when you genuinely want to assist someone and want to co-sign the loan, but you must first assess the situation and ascertain the borrower's financial situation, income, and cash flow.
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