| Real estate connection
Signing a loan for a friend or family member can be a feel-good experience. On the flip side, adding your name to someone else’s financial obligations is a huge responsibility that can be devastating for you. So is it right to sign a loan? Only you can make this decision.
Whether it’s a car loan, mortgage, student loan, or home lease, your signature on someone else’s promise to pay is nothing more than your obligation to assume responsibility for that borrower’s debt if that borrower fails to meet their obligations. Engagement is serious business and can affect many aspects of your financial future. Here’s why.
First, there are many reasons a borrower might need a co-signer. Perhaps your child has no credit history and needs a “boost” to get their financial life going. In this case, the benefits of co-signing can outweigh the financial risks involved in jeopardizing your good credit rating. Alternatively, a person may need a co-signer as they do not have enough credit to qualify themselves. Will adding your commitment to stand behind them change their bill paying habits financially? In many cases the answer is no.
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In general, the risks of co-signing a loan outweigh the benefits. For example, adding someone else’s debt to your existing obligations can easily affect your debt-to-income ratio, or DTI. DTI is the ratio of your debt payments to your income. A person who makes $ 4,000 a month and has $ 1,500 a month in debt has a DTI of 37.5 percent. Co-signing someone making a $ 500 monthly payment for a vehicle or home loan or lease increases the co-signer’s DTI to 50 percent, which could easily prevent the co-signer from qualifying for their own vehicle or home loan .
Another disadvantage of co-signing is the potential reduction in the creditworthiness of the co-signer. Because lenders fail to notify a co-signer if the lead borrower makes a late payment, misses a payment, or stops paying altogether, it can take many months for the co-signer to realize that the lead borrower’s indiscretions have negatively impacted their creditworthiness. That’s because 35 percent of a person’s score is based on whether that person makes their payments on time.
Co-signing can also tie up a co-signer’s credit for a longer period of time. Once a co-signer signs on the dotted line, they are usually required to hold the loan until the loan is paid off or refinanced in the name of the lead borrower. The payment obligation can be as little as 3 to 6 years for something as simple as a car loan, or several decades for something as daunting as a 30-year mortgage. And should the main borrower become incapacitated or die, the responsibility for repayment rests directly on the co-signatory’s shoulders.
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Cosigning isn’t the only way you can help a friend or relative build or improve their credit score. Adding the person as an additional cardholder to one or more of your credit card accounts is an easy and safe way to set up or add positive credit lines to someone else’s credit files without affecting your credit history. The key is to maintain control of card usage by denying the other person access or by tightly controlling the card. The other person can also set up their own line of credit through the use of a secured credit card, which limits credit usage to the amount of money the person deposits into the secured card’s account.
That excellent credit that you have built up over the years can have a negative impact if the person on whose behalf you are signing fails to keep their deal. So think carefully before reaching for this pencil.
See you when you close!
Gary Sandler is a full-time real estate agent and President of Gary Sandler Inc., Realtors in Las Cruces. He’s happy to answer questions and can be reached at 575) 642-2292 or Gary@GarySandler.com.
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source https://collegeeducationnewsllc.com/think-carefully-before-cosigning-for-a-loan/
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