Top 10 Reasons Not To Add Co-Signer on a Loan

13 Jul 2020

It is good to assist your friends and family especially if you have a good credit score by co-signing for various loans such as education loan, car loan, personal loans etc. But co-signing is not just about adding a name to an agreement; it has its own limitations. You might co-sign on a car loan or house loan with the intention of helping your closed ones but remember you will be equally liable in case the loan does not get cleared on time. As your good credit score is helping you co-sign a loan, all the risk will be on you if the loan is not repaid. Unfortunately, there are many reasons not to add a co-signer on a loan. Here we are bringing out the primary ones

Top 10 Reasons Not To Add Co-Signer on a Loan

1.    High risk associated

You might co-sign on a loan for a house or a car that you are not part of, but that doesn’t mean you are less liable to clear the loan amount. The monthly EMI’s will be slightly less for the borrower considering your good credit scores but the risk associated will be very high in case the borrower of the loan does not repay it. It’s a good thought to help someone by using your good credit scores but that someone will be trustworthy to you and will repay the loan amount on time is not guaranteed.

2.    You will be in trouble if the loan amount is not repaid

The lender will directly question you in case if the loan amount does not get repaid on time. Even if you are not the direct borrower, by co-signing on loan agreement, you are taking the credits from the loan defaulted person. It does not matter which type of loan you are co-signing, all that matters to the lender is to recover their money back.

3.    Co-signing can spread negativity amongst friends and family

Personal relationships and money should be kept separate if you want them to stay good and healthy. Since you are financially as well as legally liable for your closed one’s loan,  you might keep an eye on them to check if they are making payments on time and this can ruin a happy relationship with your friend or family.

4.    You will be liable for the entire loan amount

.Co-signing a loan means you are equally liable to pay it if for some reason borrower fails to pay it on time. The lenders will get a hold of you until and unless the entire amount gets settled without any negotiations of being a co-signer and not the actual borrower.

5.    Ready to face tax consequences if the debt is settled by the lender

The lender might agree to settle the loan amount in case the borrower fails to pay it. Being a co-signer you could have a tax liability for the difference of loan amount and settled amount. Suppose if you owe $12,000 and settle for $8,000, you may have to fill the other $4,000 as “debt forgiveness income” on your income tax returns. This settlement will leave a negative impact on your credit report.

6.    It might reduce your opportunities to get loan approval for yourself

Co-signing a loan might reduce opportunities for you to lend a loan for yourself. Having too many credits by your name can get a loan application denial. So be wise in your decisions of helping someone out as you might need it for yourself one day.

7.    Your co-signer will be liable to pay for your missed payments

In the worst case scenario, if you become insufficient to repay the loan, your cosigner will become liable to make your monthly payments until you’re able to repay and settle the loan amount.

8.    Your co-signer can counter sue you for not repaying the loan

While cosigning your loan, cosigner becomes legally accountable for full payment of the outstanding balance. But they can sue you in some unfortunate cases when you are not sufficient enough to repay the loan amount.

9.    You will need to track someone else’s payments

In case you are co-signing, you will need to be organized enough to keep track of someone else’s payments. This means an added monthly task for you.

10.    You may not like to counter sue the primary signer

You may have to take legal action against the primary signer in order to get the loan cleared. There might be endless issues in suing the borrower of the loan and there is quite a possibility that you end up paying the entire loan amount.