Thinking of co-signing a loan? Proceed with caution

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Here are some questions and answers on co-signing a loan:

Can co-signing a loan affect my credit rating?

Yes. Even if the borrower repays the loan on time, the loan will usually show up as an obligation on your credit report, Griffin said. This means that lenders will take this responsibility into account when you apply for a loan on your own. If the additional loan makes your overall debt appear high relative to your income, Mr Johnson said, you could end up paying a higher interest rate on your own loan.

Can I opt out as a co-signer?

Once you’ve co-signed a loan or credit card application, Griffin said, it’s hard to get out of the pledge, especially if there have been late payments. “It’s very unlikely that the lender will allow you to change this contract,” Griffin said, because the reason a co-signer is required is to reduce the lender’s risk.

One possible way to get out of an obligation to co-sign a car loan or mortgage is to ask the borrower to refinance the loan only on their behalf, Mr Johnson said. Credit cards are more difficult, he said, but there is a possibility that once the card balance is zero, you can ask to be removed from the account. The card company can then decide to allow the primary cardholder to remain the only name on the account or to close the account and have the borrower re-apply for a card separately.

Some private student lenders promote the possibility of releasing co-signers from their obligation once the borrower meets criteria such as paying a year or more on time. But in practice, it can be difficult to get released on a student loan, according to the Consumer Financial Protection Bureau.

How can I protect myself as a co-signer?

The Federal Trade Commission suggests that you try to negotiate the specific terms of your bond before agreeing to co-sign. For example, you can ask to limit your liability to the principal of the loan and exclude any additional charges such as late fees or court costs. If you are successful, ask the lender to include a statement in the contract. For example, the Federal Trade Commission suggests this language: “The co-signer will only be responsible for the principal balance of this loan at the time of default. “

After you co-sign the loan, you need to stay in touch with the borrower to make sure payments are made on time, Griffin said. If that’s not possible, you can contact the lender to check the status of the loan, he said. You can also check your credit report periodically, to see if any late payments have been recorded. Mr Johnson advises doing this at least every three to six months.

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