There may come a time when you will find yourself considering cosigning a loan for a friend or relative who finds themselves in need of financial assistance. As you consider potentially extending your credit; there are things that you need to take into consideration. Remember, the financial obligations of that loan become part of your credit portfolio as such:
1. The debt that your friend/relative has available with you, as a consignee, will be calculated into your debt load. When the credit bureaus calculate your debt-to-income ratio, this debt may lower your chances of being extended credit for a major loan.
2. Any deviation from the repayment schedule will negatively affect your credit score. It is imperative that you ensure that payments are received by the due date. Ask yourself “can I cover the payments if I had to?”
3. There is a very real possibility that you might fall out with the relative/ friend due to the cosigned loan, unless you are very careful to balance your concern for timely payments with your concern for the friend/ relative.
What do you do when you have extended your credit and find that it is too much tension to bear and want out? There are steps to take to try to release your credit of the financial responsibility.
1. Refinance the loan. The first and best option to consider is refinancing the loan. This option is generally available for all types of loans, i.e. student loans, car loans, personal loans, and mortgages. While large loans are hard to pay within a short time span, refinancing allows for more time and lower monthly installments. Often, this also means that the borrower (your friend/ relative) would be able to obtain the loan using only their credit. This option is also available with credit cards. With credit cards, the balance transfers to a new card under the name of the person for whom you have cosigned.
2. Seek out financial advisement. Often the reason why people cannot avail a loan on their own is due to a poor credit score. Encourage your friend/ relative to seek credit repair help in order to bring up their credit score. In most cases, once the credit score rises, they can avail of the loan on their own.
3. Help the person organize financially. Engage in conversations to find out what the reason behind the person’s inability to get a loan on
their own merit. Sometimes, professional help is necessary to guide this person on to the path of financial stability. Consider extending a cash loan to the friend/ relative that could put the person back on track without putting your credit score at risk. Get involved and help.
4. Pay more to accelerate the repayment schedule. If you are financially able, help the person (and yourself) by repaying the loan sooner. You could do this by chipping in and matching the monthly installment your friend/ relative needs to pay. This way, you can repay the loan in half the time. This would ensure that your credit stays high. Arrange a less stringent repayment schedule for the payments made on their behalf. You will both benefit in the end.