If someone cosigns a loan and it goes into default, lenders ask the cosigner to help repay it as much as 75 percent of the time, according to the Federal Trade Commission. Although cosigning is often seen as a negative because it means the other party was too risky to obtain a loan themselves, the cosigner and primary account holder can raise their credit scores with a good payment history.
Benefits
When you cosign on a loan, you share credit history with another party. If the loan has had a good history, you will instantly receive that positive information on your credit report. Any future timely payments will also apply to all cosigners on a loan.
Considerations
While you will share positive information, you also increase your debt obligations. If you want to apply for another loan, lenders will look at your income and compare that to your debt burdens. Even if you have a perfect credit history, if your debt payments exceed 35 percent of your income you could have a hard time getting a loan.
Risk
Like good information, negative items appear on the credit reports of all cosigners. Once you cosign on a loan, removing your name from the account is nearly impossible. The other party on the account would need to refinance the loan -- swapping the loan with a loan that has more favorable terms -- or in case of a credit card, open a new account and transfer the balance.
Tip
You should review any loan application before signing on it and determine if you can pay it off if the other party defaults on his payments. If the cosigner does default, it may be better for your credit to pay off the rest of the loan than deal with late payments and collections agencies.
0 comments:
Post a Comment