Pros and cons of co-signing a loan
20% report that their credit score was lowered after co-signing a loan
(InvestigateTV) — A little over 20% of American adults have co-signed a credit line for family or friends, according to Bankrate.
Co-signers personally guarantee the debt and can be legally required to repay the total amount, plus any fees or penalties if the original borrower cannot pay, according to the Federal Trade Commission (FTC), while having no claim to the items or property being financed.
According to Bankrate, 29% of all co-signers are parents assisting their adult children.
Cherry Dale, a financial coach with the Virginia Credit Union, said it’s nice when parents have the option to assist their children, but cautioned them to carefully consider the impact on their finances before doing so.
“Because once you sign on that dotted line and you are co-signing let’s say a car loan, a credit card and personal loan, you are responsible for that,” Dail said. “You are both responsible for that payment.”
Dale said those co-signing for a relative should look at the relative’s credit and past payment histories, and put in writing who’s paying for what.
“If you are late or they forget about it, or if people forget about it, it will affect your credit score,” Dale explained. “In fact, payment history is the number one thing that lenders do look at when it comes to your overall credit score.”
According to the FTC, lenders also count the amount of co-signed loans towards the debt ratio of the co-signer. For example, if someone co-signs for a $30,000 car loan for their child, then that loan shows up on their credit report and the amount is added to the co-signers total debt load.
NerdWallet has a helpful article – “Co-Signing a Loan: Risks and Benefits” – for those considering whether to co-sign a loan.
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