Should I Cosign on a Loan for my Relative?

The average credit score in the U.S. is 687, which is considered fair. Many people in the “fair” range of credit can have a difficult time getting approved for loans, credit cards, or even apartment leases. While it’s not impossible to get a loan while repairing your credit, it may require a cosigner. If you’ve been approached by a relative to co-sign a loan, here are some things to consider.

Your Responsibility

When you cosign a loan, you aren’t just giving someone your proverbial stamp of approval. You’re actually agreeing to be responsible for repayment of the loan in the event that the borrower defaults. Depending on your own financial situation, this could potentially have a major effect on your credit.

For example, if you currently live paycheck to paycheck, you may want to consider the worst-case scenario of being a cosigner. Can you afford to make an additional monthly loan payment? If not, it may not be wise to cosign a loan for anyone.

Your Credit Score

Speaking of credit, a loan that you appear on as a cosigner will still appear on your credit report. If payments are made on time, and the loan ends up being paid in full, this will likely boost your credit score. However, if the loan amount is large, and you are planning to take out a loan of your own in the near future, this could hinder you from approval.

If cosigning on someone else’s loan bumps your own debt-to-income ratio above 40 percent, this will definitely make a difference in your ability to take out another loan of your own. So before you agree to cosign for someone else, make sure it will not impede any of your own financial goals, or lower your own credit score.

Your Relative

Many of your concerns about cosigning on a loan probably come down to your level of trust in the relative in question. If it’s your child or a sibling, cosigning could be an opportunity to help them build credit and become a more independent adult.

If it’s an older relative, caution may serve you well. If an individual has had years to build credit, but still finds themselves needing a cosigner, it may speak to a history of financial instability, or a past foreclosure or bankruptcy. While it’s usually considered uncommon, and even impolite, to discuss finances with your relatives (other than your child), if someone has asked you to cosign a loan, you have a right to know more about their credit history.

If this relative is someone who has a demonstrated history of paying bills on time, has a steady job, and is likely to be employed for the foreseeable future, then you may have nothing to worry about. It really just comes down how well you know this relative and how much you trust them to pay their bills (on time and in full).

If you’re considering cosigning a loan for a relative, only you can ultimately decide if this is the right decision for you and your credit. Many people have had to ask for a cosigner and have gone on to achieve great financial stability and success. To learn more about credit repair, visit creditrepair.com.

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