TOPEKA (WIBW) -- Co-signing for a loan – sometimes it’s just the boost your family member or friend needs. Here's what Carl Carlson of Carlson Financial told us about what you need to know before you sign the dotted line.
It might be needed for auto loans, mortgages, credit cards, and private (not federal) student loans when a borrower can’t obtain credit on their own. Often because of lack of credit history, as in the case of a young borrower, or poor credit history, if someone has been late on payments in the past.
First, it will show up on both the borrower and the cosigner’s credit report. If all payments are made on time, this could help both parties. But if they’re not, the opposite is true and it will hurt both the borrower and cosigners credit. Also, since the loan appears as an open line of credit for the cosigner, it could potentially make them look more risky to their own borrowers, or make it harder to get a new loan for themselves.
So it WILL affect the cosigner’s credit report. And then there is the obvious risk of payments not being made on time. If the borrower is late or misses a payment, that’s an event that will stay on your credit report for years. And now, the lender will expect the cosigner to pay the loan, just as if they had borrowed the money themselves. It’s possible they even send it to collections.
Many lenders have criteria that must be met to release the cosigner of a loan. Sallie Mae, for example, publishes a list of 10 conditions that must be met, and according to the Consumer Protection Financial Bureau, 90% of requests are denied. And how do you manage that risk?
* Know your borrower and their budget – how do they play to make these payments?
* Review your own budget – can you afford it if they default?
* Get duplicate copies of everything: loan documents, monthly statements, and login information so you can always check the status of payments.
* Get off the loan as soon as you can, either by having the borrower refinance, or see if the lender offers cosigner release.
Call Carl to ask your questions, at 844-CARLSON. And watch for Carl, back with Ralph Hipp on the Red Couch Show in 2019.