Co-signing a loan agreement has become quite common now. And you may also want to cosign a loan agreement with your loved ones to help them out in their tough time. But before you do that there are certain important things which you should know. This is a generous act and can help your friend or family to get approved for a loan that they otherwise wouldn’t qualify for. But this includes risk as you are guaranteeing repayment of a loan for somebody else.
Hence, it becomes important for you to know a few things before co-signing a loan agreement and what happens when you do it?
What Does Co-Signing a Loan Agreement Means?
The reason why your loved one needs you to cosign for a loan is that he/she is lacking with the eligibility criteria or they are not creditworthy to get the loan. In these cases, the lender refuses to approve a loan for them and requests a co-signer for security.
Well, co-signing a loan agreement is different from being a co-applicant, as a co-signer doesn’t apply to get the loan. A co-signer basically helps a primary application to get approved for a loan and guarantees that he/she will repay the loan when the primary borrower is not able to repay it.
Things to know before co-signing a Loan agreement
Your Credit Score Could Be Impacted
When you co-sign a loan agreement there are certain risks involved in it. If the borrower with whom you have co-signed does not repay the loan as agreed, there are chances that it will be reflected in your CIBIL score as well. This is because your credit score will suffer along with the primary borrower’s credit score and this can affect your creditworthiness.
Another scenario could be that the primary borrower doesn’t pay the loan payments on time, and as you are the guarantor, this late payment history will be reported to the credit bureau and will again affect your CIBIL.
If you co-sign a loan agreement lenders expect you to come up with the repayment plus any additional interest in case of non-repayment by the primary borrower.
It is also possible that the lender may call you and serve you with legal notices as you have co-signed the loan. Things can be worse in the case of personal loans as these are unsecured loans and don’t have any collateral backups. However, a personal loan does not require a guarantor but if the loan amount is high the lender may ask for a guarantor or co-signer.
Things can go bad for your personal relationship
This may sound strange to you but things can go wrong and can spoil your personal relationship. This may happen when the primary borrower who is either your friend or family is not able to repay the loan. In this case, the first person the lender comes after is you. By co-signing the loan, you are the one that enabled the defaulter to get the loan initially. In this case, there are chances that an argument may happen between you and the borrower, and in the worst case, it can spoil your relationship.
When Should You Agree to Co-Sign for a Loan?
When you are sure about the loan repayment
When someone asks you for co-signing a loan it is quite obvious that you know that person well. But, before you co-sign the loan it is important to know the financial status of the borrower and enquire about his repayment plans. If you are sure that he/she will repay the loan without any default then you can co-sign the loan agreement without any doubt.
When you can afford the risk
You should only agree to co-sign for someone else’s loan if you think that you can afford to take the risks. As discussed above there are certain risks involved in co-signing a loan and if you think you can afford those, you can surely move ahead and sign it.
But remember that while you might be able to afford the risk now, you need to be able to absorb losses in the future.
Before you co-sign, evaluate the pros and cons. There can be a time when you truly want to help someone and want to co-sign the loan but, you need to evaluate things and know his/her financial status, income, and cash flow to be sure about the repayment.