Is It a Good Idea to Cosign a Loan?

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If a younger friend or relative requests your help in obtaining a loan by serving as a cosigner, you may be inclined to lend a hand. After all, it doesn’t cost you anything to help, right? In fact, it could end up having a substantial detrimental impact on your own credit, even leaving you vulnerable to lawsuits from creditors. Learn more about what is involved in cosigning a loan before agreeing, and speak with an experienced Maryland real estate attorney about the contract and primary borrower in question before signing.

If the primary borrower doesn’t pay, you will

Cosigning isn’t merely a theoretical exercise; by cosigning with a borrower, you’re promising to pay the debt should the primary signatory fail to meet their obligation. In this way, acting as a cosigner can be almost as big a commitment as taking out a loan yourself. Remember that when a bank requires a cosigner, it means that the institution isn’t willing to gamble on that borrower alone. While this fact may be due to a paucity of borrowing history rather than a history of late payments and defaults, make sure you know exactly why the borrower has been denied from taking out a loan without a cosigner.

Cosigning with a responsible borrower could provide a boost to your credit

While you’re accepting the risk that a borrower won’t pay back a debt when you cosign a loan, you also stand to benefit from their consistent repayment. When you cosign a loan, that loan will appear on both your and the primary borrower’s credit reports. In the same way that you built a strong credit score for yourself by making mortgage or credit card payments on time, the primary borrower’s timely monthly payments could further strengthen your credit.

Your ability to borrow could be limited

Since a loan you cosign will appear on your own credit score, this also means that your debt-to-income ratio will increase. This number is a representation of how much you make each month relative to the amount you make in debt payments each month. Should you decide to apply for a loan or other source of credit for yourself after you’ve agreed to cosign someone else’s loan, you run the risk that your debt-to-income ratio will be too high to qualify for a good interest rate, or to qualify for additional credit, period.

For legal assistance with real estate matters, contracts, and commercial law in Maryland, contact the knowledgeable Annapolis real estate contract attorneys at the Law Offices of Matthew S. Evans III for a consultation on your case, at 410-626-6009.