Cosigning a loan can have both risks and benefits. Here are some key points to consider:
Risks of Cosigning a Loan:
Financial Responsibility: As a cosigner, you become legally responsible for the loan amount and any additional fees if the borrower is unable to pay .
Debt Accumulation: Cosigning on a loan could add a significant amount of debt for the cosigner. This may affect their ability to apply for a large loan in the future .
Difficulty in Getting Out of the Loan: It can be challenging to get out of a cosigned loan, especially for student loans. If the primary borrower files for bankruptcy, the cosigner may become responsible for all the payments on the student loans .
Tax Implications: If the loan is forgiven by the lender, the remaining loan amount may be considered debt forgiveness income by the IRS. This means the cosigner may have to pay taxes on the loan amount as if it were income .
Credit Impact: Late payments or default on the loan can negatively impact the credit scores of both the borrower and the cosigner .
Relationship Strain: If the borrower fails to make payments, it can lead to strained relationships and emotional stress for the cosigner .
Benefits of Cosigning a Loan:
Loan Approval: Cosigning a loan can help someone who may not qualify for a loan on their own due to factors such as a lack of credit history, bad credit, or an unstable income .
Improved Loan Terms: Having a cosigner with a strong credit profile can potentially help the borrower secure better loan terms, such as lower interest rates or higher loan amounts.
Assistance with Employment Requirements: In the case of a mortgage loan, a nonoccupant co-client with a solid employment history can help fulfill the lender’s requirement for reliable and steady income .
Opportunity for Reduced Security Deposit: A cosigner may help the borrower get a reduced security deposit on an apartment lease.