Understand how co-signing loan can affect your credit score

July 13, 2020

Co-signing a loan for a loved one can help them get easy approval and maybe even lower interest rates on their online personal loan. However, before you consider going the extra mile, it is essential that you review your financial wellbeing. Understanding all there is to co-signing can help you make the right decision. Follow these 4 steps to decide whether co-signing is the right move for you.

Look at why you may need to co-sign the loan

While there are various shortcomings the applicant may like to overcome with your signature, the general reason why your help is required is to assure the lender of repayment. This means the lender doesn’t view the applicant as creditworthy enough to grant a high sum at a low interest rate or approve the personal loan application as a whole.

While one of the reasons could be the absence of a credit record for the applicant, it can also mean they have defaulted on loans before or pose a risk of defaulting. To be careful, it is essential you narrow down on the reason they require your signature to make a better call on whether you should co-sign the personal loan application or not.

Understand how co-signing loan can affect your credit score

While you may not see the harm in helping a family member or friend, it is important to consider your own credit score too. This is because co-signing a loan makes you equally responsible for its repayment. In other words, any defaults, even late personal loan EMI payments, are bound to reduce your credit score.

Take negative outcomes of co-signing loan into consideration

Are you wondering what could possibly go wrong? In case of a default, you are completely liable to pay the remaining dues to the lender. This is a huge responsibility and while you may trust the applicant to repay the loan amount, it is important you consider whether your finances are strong enough to carry this extra obligation without strain. While you may not like the idea of repaying someone else’s dues, it may be the only way to save your credit score in case of a default.

Follow preventive measures while co-signing a loan

Ask the applicant whether they are sure they will be able to manage repayment effortlessly and don’t just take their word for it despite your desire to do so. As someone who shares equal responsibility of repayment, you have the right to request a view of their repayment strategy and their income sources to ensure you aren’t exposing your credit reputation to irreversible threats.

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Understand how co-signing loan can affect your credit score

Look at why you may need to co-sign the loan

Understand how co-signing loan can affect your credit score

Take negative outcomes of co-signing loan into consideration

Follow preventive measures while co-signing a loan

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