There are so many benefits involved with having a good credit rating. There is almost nothing in the financial world that you are prohibited from, if your credit ratings are high. However, there are certain things that come with risks you should never ever take. One of these things is co-signing a loan.
Co-signing a Loan
No financial expert would deny how frightening co-signing a loan is. It basically means that you—a person with a good credit rating—sign a loan along with someone who is unable to get one due to their bad credit rating. In simpler terms, you, as a co-signer and a good-credit holder, take the guarantee that if the other person defaults, you will pay back their loans. This means you are the one held accountable for a loan that someone else takes.
Following are some of the major reasons why you should never become a so-signer.
High Risk—Low Return
The worst thing about a being a co-signer is that you risk too much for too little. The only benefit you get of being a co-signer is a slight increase in your already-great credit ratings. On the other hand, the risk of the borrower going bust and requiring you to pay back on his behalf is too high.
You Are Reliable
By being a co-signer, you take all the responsibility over your own shoulders. This means that you are the first person to be sued by the lender in case a borrower defaults. The reason why the lender will pull you in the lawsuit first is because you are the one guaranteeing the borrower’s repayment.
The Negative Dilemma
Another negative aspect of being a co-signer is being on bad terms with the borrower due to a default. Since they already have a bad credit rating, getting another negative mark by stopping the repayments will not make much of a difference to their position. You, on the other hand, will not only have to pay back the entire loan but also risk a fall in your credit ratings.
Loss of Personal Relationships
People usually tend to co-sign for someone close like a friend or a partner. However, since by co-signing a loan, you are the one who are on the hook, you have to make sure that the borrower makes regular payments on time. This is quite stressful as you normally aren’t in a position to force a payment out of the other person, and if you do, it consequently makes your relationship bitter.
In a case where the borrower defaults, the lender might call for a settlement instead of a lawsuit. This might sound not-as-bad, but it actually is. Consider owing 10,000 pounds, for which you settle on repaying 6,000. You will have to file the remaining 4,000 on tax returns, which will show the settlement as ‘settled’ rather than ‘paid as agreed’. This remark will also pose a negative impact on your credit rating.
You cannot deny the fact that co-signing does not bring you any good, at least in majority of the cases. This is why it is always recommended not to ever become a co-signer.