If you’ve been asked to cosign a loan to help out a friend or family member, you may need to think twice before signing on the dotted line.
The loan you are cosigning for may come at a price and if the borrower ends up defaulting on the loan, you could be responsible for a high-interest loan that takes years to pay off in full.
Have you considered to review your credit score? A credit score is based on your total debt amount, the number of open accounts, repayment habits, and other aspects of your credit history. Lenders typically label a credit score under 670 below average, while 630 is considered to be on the bad side.So, what happens if you have a lower credit score?
Keep your finances on a healthy track by avoiding being a cosigner on these types of loans:
1. Private Student Loans
Many parents cosign for these loans because when their children are students they simply don’t have the credit history to qualify for the loan on their own.
However, private student loans usually have higher interest rates than federal loans and student loans cannot be written off in bankruptcy court. Since these loans often end up being for thousands or even tens of thousands of dollars, you could be looking at many years of debt repayments.
2. Mortgage Note
Cosigning for a friend or family member’s mortgage can also be a bad financial move. Most mortgages are decades-long commitments and may even end up being a 30-year obligation. If the borrower/homeowner fails to keep up with their payments, you would be responsible for the mortgage payment. The house note would also show up on your credit report as another debt if you were a cosigner.When the time comes, if you are able to acquire a traditional home loan, you have an option to buy a property you have been renting. Rent-to-own contracts typically include: Option fee – A non-refundable upfront payment that locks the price of a property and ensures a buyer an option to purchase at an agreed-upon date. A typical option fee is between 2.5% and 7% of the purchase price. So, if you plan to purchase a home for $200,000, with an option fee of 5%, you would need to pay $10,000 upfront.
3. Business Loans
When a friend or family member is looking for capital, you may offer to help out by cosigning a business loan. However, it’s important to remember that the business venture could fail — and you would be responsible for the debt load. Many lenders require borrowers to use their home as collateral for the loan — which means you’re basically putting your home at risk as a cosigner under these circumstances.
4. Payday Loans
Payday loans have very high interest rates and most people can get one of these loans fairly quickly. However, the lender will only loan the money to one person at a time which means that cosigning for the loan would technically make you the person responsible for the loan payment. If the other person fails to pay on time, the lender has every right to withdraw payments directly from your checking account.
5. Car Loans
Many people end up taking out a loan to pay for their car and these are typically five-year loans. Increasingly, though, many automobiles are being financed as 72- or 84-month car loans. Monthly payments can be several hundred dollars, depending on the vehicle. So consider whether you can really afford that type of financial obligation if the person you are trying to help fails to make their payments on time.
6. Balloon Loans
Balloon loans are designed to ensure that a borrower is just paying interest on the loan until the end of the loan term when the remaining balance is due. However, cosigning on this type of loan means you could be responsible for the loan if the borrower’s financial situation changed or if they missed a single payment.
These are just six types of loans you should avoid becoming a co-signer. Unfortunately, many people already have horror stories about co-signing. Have you ever co-signed for a loan, and if so, what happened?