What Impact Could Cosigning a Loan Have on Your Credit?
You may have been approached by a friend or young relative about helping them out by cosigning on a loan or lease for them. While it might seem like a harmless way to help someone who either has a minimal or poor credit history, this decision does come with some risks that should factor into your decision. Before committing, carefully consider what is entailed in cosigning a loan, and discuss both the loan and the primary borrower with an experienced New York real estate attorney to enable you to make an informed decision.
If the primary borrower pays on time, you could see a bump to your own credit score
First, some possible good news: cosigning with a responsible primary signatory could end up increasing your own credit score. You may not realize it, but cosigning a loan means that the cosigned loan appears on your credit score, not just on the primary borrower’s. In the same way you built up your own credit score through timely payments, the individual with which you’re cosigning can build your score, too. If that borrower makes their payments on time, or pays down a debt early, this will be reflected in your own credit score.
Your debt-to-income ratio will go up
As mentioned above, a cosigned debt will appear on your credit report, like any other debt or source of credit you may currently have. As a result, if you apply for a new loan or credit card, lenders will count the cosigned loan when calculating your debt-to-income ratio. This number weighs heavily in a determination of whether you have a sufficient income to support the amount of debt you have accrued. A lopsided debt-to-income ratio will result in higher interest rates, or even flat-out denials, from lenders.
Cosigning can be a gamble
Most importantly, never forget that the reason the borrower needs a cosigner to obtain a loan is because something in their financial history is telling the bank that this person is a risk. If the borrower for whom you cosign a loan doesn’t pay their debt, then the lender will come to you for payment. Make sure you understand why the potential borrower is unable to obtain credit without your help before you agree to help out; whether the denial was due to a lack of credit history or a poor record of repayment can make a big difference in whether or not cosigning with that person is a wise idea.
If you have questions about a contract or real estate transaction and want guidance from experienced New York attorneys before you sign, contact the knowledgeable Hudson Valley real estate lawyers at Rusk, Wadlin, Heppner & Martuscello for a consultation on your matters, at 845-331-4100 in Kingston or in Marlboro at 845-236-4411.