Co-signing on a car, house or school loan for a loved one is a great way to help them build their credit or obtain financing. While providing support can be a very fulfilling experience, you must always be wary of the financial consequences that could arise.
The following are things you may want to consider before co-signing on a loan:
- Co-signing is a high-risk, low-reward process. Although you may see a small increase in your credit score, any missed or late payments are strikes against your credit.
- If the person misses payments on the loan, you can be liable for paying the full amount as well as any missed payments.
- Co-signing can have a large effect on your debt-to-income (DTI) ratio. Your DTI ratio is the percentage of your debt payments in comparison to your income. Having a high DTI ratio shows that you may have more debt than income, which can lower your credit score—making it harder for you to establish new lines of credit in the future.
If you do decide to co-sign for someone, have an open conversation with them about your expectations. Discuss when the payments are due, talk through any concerns you might have and monitor the account periodically to ensure the loan is being paid adequately and in a timely manner.
Material posted on this website is for informational purposes only and does not constitute a legal opinion or medical advice. Contact your legal representative or medical professional for information specific to your legal or medical needs.