Will you regret having signed a personal loan?
Personal loan lenders verify borrowers’ credit and income before granting them a loan. If their financial credentials are not good, they may be denied the opportunity to borrow without a qualified guarantor.
If you have good credit, there is a chance that one day your loved ones will ask you to be that collateral. That would mean that you apply for the personal loan with the main borrower; your credit would be assessed by the lender and you would also be legally responsible for the loan. While it’s tempting to provide that kind of help, the reality is that there are many reasons why you may not want to guarantee a loan for someone else. Here are four of them:
1. You may be responsible for paying it.
If you sign a loan, you agree to answer for the primary borrower who assumes the debt. Basically, you agree to pay the money back to the lender if you don’t. As a result, it is very possible that you will get stuck paying part of the borrowed amount. There is often a reason why people need an endorsement:
They may not have a solid record of paying bills on time. They may be young and haven’t had time to build a strong credit history. They may have been unlucky and lost a job or had a medical problem. Whatever the reason, unless you are very confident that the person you are listing for is financially responsible and will pay the debt, there is a serious risk that you could end up hooked on it.
And sadly, if something happens and the primary borrower is unable to repay the loan, such as death or disability, the creditor will still wait for you to pay it back. So there is always the possibility that you will get stuck paying the bill.
2. It could affect your ability to borrow
A co-signed loan shows up on your personal credit history. In other words, the payment counts toward your debt obligations and is seen by lenders when they assess your credit. For more information, see this article on the information included in a credit report. This means that your own future ability to borrow money could be affected because of that debt, since most lenders look at your debt-to-income ratio before approving you for a loan.
If you want to get a credit card, mortgage, car loan, or any other debt and you’ve signed a personal loan, the monthly payment could push your monthly debt obligations over the lenders’ limit. If that’s the case, your loan could be denied.
3. It could damage your relationship with the borrower
If the person you are signing for cannot pay the debt and you get stuck with it, this could leave you resentful and angry, which could leave your relationship in shambles. Think about whether the financial help you are providing is worth this potential consequence.
4. Your credit score could be hurt
Your co-signed personal loan payment record also appears on your credit. If the primary borrower makes late payments, they will show up on your record and damage your credit score. This could affect your ability to borrow for a long time. Your credit report may also be reviewed by utilities, potential employers, landlords, and insurers. Therefore, you could face a lot of financial damage until you rebuild your credit.
The bottom line is that putting your credit on the line for someone else has significant financial and personal consequences. It’s not something you should say yes to unless you have a very good reason to do so.