6 Reasons to Think Twice About Co-Signing a Loan

co-signing-a-loan

If your credit and finances are in good shape and you have friends or relatives who are not in such a good credit position, you may have been approached to co-sign for a loan or credit card.

While your friend or relative may deserve the help, it’s not always wise to lend a hand to a sagging financial situation. Here are six reasons why you should think twice before you sign on the dotted line for someone.

1. Risk-to-Reward Ratio Doesn’t Favor You

If you co-sign a loan, the liability lies squarely on your shoulders should your friend or relative not make the payments. They may still be enjoying the home or car they got with the loan while you are left holding the bag on the responsibility of paying it off. And, if you don’t…

2. A Lender May Sue You if Payments Are Not Made

“When a cosigned loan goes into default, the creditor can collect against all who are named on the account since they have an equal share of the responsibility to repay the entire balance,” according to Bruce McClary, vice president of communications for the National Foundation for Credit Counseling. “A creditor can make their own decision to pursue the primary borrower or collect from the cosigner. It is common for a lender to make first attempts to contact from the primary before turning attention to the cosigner.”

3. If a Loan Payment Isn’t Made, Your Credit Is Impacted

The co-signed loan will appear on your credit reports, including the payment history — good or bad — for the loan. While the damage late payments can do is mitigated over time, generally, your credit report can be severely impacted for years. You can see how your payment habits are affecting your credit by viewing a snapshot of your credit report, updated every 14 days, on Credit.com.

4. Your Relationship May Suffer

As the old saying goes, “money and friendships don’t mix.” Placing your credit report and therefore credit scores in the hands of another individual can place a strain on a relationship. You may begin to notice other money behaviors that you previously thought were quirky or endearing that now seem alarming. Your feelings about your loved one may change in a negative way.

“It is not uncommon for relationships to end when cosigned loans slip into default, leaving much more than a financial mess,” McClary said. “This can be prevented if people either avoid cosigning altogether or proceed with a plan that accommodates for keeping the lines of communication open during hard times.”

5. You Could Face Tax Consequences

When autos are repossessed, there can sometimes be what is known as a deficiency balance. This is the result of when the lender has repossessed the vehicle, takes it to auction and is not able to recoup the amount still owed by the borrower.  Some lenders will forgive or write off a deficiency balance if it’s obvious the borrower has no assets, but if you’re co-signing for someone, chances are there are enough assets between you and the person you’ve co-signed for that the lender is not going to be as lenient. In that case, the deficiency balance could be turned over to a collection agency that may be willing to cut a deal to accept less money than is owed and will mark the debt as paid in full.

In the case of credit card debt, once a debt goes 90 days delinquent, a bank is usually willing to talk debt settlement.

In cases where the amount forgiven during debt settlement (or the difference between what is owed and what the lender gets for a car at auction) is $600 or more, a lender must issue a Form 1099-C or 1099-A to the borrower (and the co-signer) and the difference must be reported as income on that year’s tax returns. That’s because the difference between what is paid on the debt and what is owed is considered a net income gain by the IRS, and taxes need to be paid on this gain. If your tax bracket is 28% and the amount forgiven is $2,000, you could wind up owing Uncle Sam an additional $560 come April 15.

6. You May Be Turned Down for Other Loans

Even if your friend or relative makes all the payments on time, your borrowing ability will be affected.

“Provided that the creditor reports account activity to the credit bureaus, cosigning a loan will likely mean that the account will show up on the cosigner’s credit report,” McClary said. “This means that it will impact their debt ratio, which influences a lender’s decision about whether they can afford to take on more debt.”

Image: BartekSzewczyk

The post 6 Reasons to Think Twice About Co-Signing a Loan appeared first on Credit.com.

6 Ways You Can Wreck Someone Else’s Credit

wreck-someone-else's-credit

You do a lot to make sure your credit is in decent shape. More often than not, you’re paying your bills on time and you do your best to keep your debt utilization ratio where it should be (experts recommend keeping your debts at 30%, ideally 10%, of your total credit limit). So, when you check your credit scores — you can see two of them for free on Credit.com — you usually see the positive results.

But what about the time you slipped up and forgot to pay a few bills? Or moved without giving your roommate that last rent check? These things may not be showing up in your credit history, but they could be damaging the credit of others. Here are six things you could be doing that could destroy someone else’s credit, whether you realize it or not.

1. Not Paying on a Co-Signed Loan

You know that shiny set of new wheels you got when you graduated, thanks to Mom or Dad co-signing an auto loan with you? When they put their name on the dotted line, they guaranteed they’d pay the debt if you didn’t, even though it was deemed your responsibility.

If you were late on a payment for a co-signed loan, even if you eventually sent in the check, that has consequences for the co-signer. If the loan was ultimately written off, that means your co-signer took even more of a hit. If you’re going to be late, or can’t make your car payments, it’s a good idea to talk with your co-signer to see if they can cover you so you don’t get hit with late fees and they avoid seeing any damage to their credit. And you certainly don’t want to skip out on paying altogether.

2. Racking Up Debt as an Authorized User on a Credit Card

Having an authorized user is a risk that can backfire if they run the charges over the assigned limit or run up an unmanageable balance, leaving the primary cardholder to deal with the consequences that include a damaged credit rating,” according to an email from Bruce McClary, vice president of communications for the National Foundation for Credit Counseling.

Authorized users aren’t held accountable for paying the balance the same way the primary user is — and that spending is also reflected on the primary account holders’ credit. So, if you’re racking up charges, it’s affecting their debt-to-credit ratio, which makes up 30% of their credit score. It’s a good idea to talk about expectations for spending and repayment before becoming an authorized user, but if you already are one, it doesn’t hurt to have that conversation now.

3. Not Paying Your Portion of the Rent

If your name wasn’t on the lease, you may not have heard about that last rent check never making it to the landlord. Or you may not have given the money to your former roommate before you headed out of town. No matter what the situation, not paying your portion of the rent could be damaging for the person whose name was on the lease. Your former landlord could notify a consumer reporting company, like RentBureau, about the missed payment or could even go directly to the credit bureaus, which could ding the lease holders’ credit.

4. Returning Library Books Late (or Not at All)

Doing this on your own card can be damaging, as the late fees can potentially send your account to collections. But doing this on someone else’s library card can have the same effect, only that would lead to a debt collector knocking on the library card owner’s door (figuratively speaking). If you borrow someone’s library card, all you have to do is make sure you’re fair and return the items you borrow by the due date. And, if you just couldn’t finish reading that book in time, go in and pay the fine — it’s usually just a few cents each day you’re late.

5. Bailing on Shared Debts After a Breakup

If you’ve been sharing the responsibility of paying a loan — whether for a mortgage, car, student loan or something else — and then something ends the relationship, that won’t end the debt. Same goes for shared credit card accounts, but if only one of your names is on the account, despite who you’ve deemed in charge of paying. Communication is key here. You don’t want to wait until a past-due notice shows up in the mail, alerting your ex that you aren’t paying their debt and have harmed their credit in the process.

6. Getting a Ticket in Someone Else’s Car

Whether you get a ticket for speeding, a parking violation, running a red light or something else, it’s your mistake. However, if you do this in someone else’s car and don’t pay the ticket, your mistake will cause the car owner’s credit to suffer, not yours. The debt may not even be on the car owner’s radar until it reaches collections or receives a judgment. As if that isn’t bad enough, the owner of the vehicle could see their car insurance rate skyrocket because of all this, too.

Image: orbandomonkos

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