Situations In Which You Should (Or Shouldn’t) Co-Sign a Loan

Providing assistance in the form of getting a loan for someone that you know is a good gesture. Yet, co-signing on one’s behalf is quite common but risky. As per statistics by CreditCards.com, one in every six people has signed with another person for either credit card or other loans.

Nonetheless, should one consider signing as a guarantor to another loan applicant? While it might feel rewarding to help someone who needs it, there are some serious risks involved here. Failure to repay the loan promptly would attach you with an obligation of paying back the principal amount borrowed and subsequent interest and penalty fees.

Similarly, 38% of these individuals paid off some part or all their loan or credit card amounts because the main borrowers defaulted. At other times, going into business deals with family members can change everything mostly if things don’t go well financially. Following are few things that will help you if you have been asked to co-sign on a loan.

Consider Who It Is

Thus, first identify who this person is asking you for support which means how familiar are you to them; a relative/ close friend / mere acquaintance? Can they be said to have come for help before? And what was the outcome? Do they keep jobs always? Are they living beyond their means? To put it differently: can they support themselves yet fail to qualify for such loans?

When you cosign , you become responsible for the borrower. In conclusion, before deciding whether or not co-signing is even an option research thoroughly about this individual who comes asking for any kind of aid.

Loan Objective

Next check out why they want to borrow money. Is it needed/wanted?” This difference matters much. For instance are they buying an essential car that will be needful in accessing job opportunities or just planning an expensive trip which is beyond their means? Or is the loan being used to investment in acquiring education or buying a house through mortgage, for example? Your answers will guide you on the choice.

Also think about if there are any mitigating circumstances. There are people who have real misfortunes like losing jobs or health problems as well as merely financial difficulties. Just because their need comes from misfortune rather than their own poor money management skills may influence your judgment.

Observe The Warning Signs

It is common to see red flags when loans involve friends and families. This could be someone borrowing from close relatives just because they do not qualify for conventional credit due to low score ratings, prior defaults or “repeat offenders” (individuals who borrow and struggle to repay).

Warning signs may include having a history of unsuccessful entrepreneurship or investments and other scams. Alternatively, it might be someone who had previously borrowed small amounts but now needs more substantial sums. What has happened in the past often dictates what happens in future. They should submit themselves for credit check and look at current debts plus credit score before accepting co-signing responsibilities.

Weigh the Financial Risks

Significant risks are carried by co-signing a loan. In case the borrower does not pay his/her debts, your credit score can be affected. Lenders may sue you and take out money from your salary making it harder for you to qualify for loans in future. In case the principal borrower is unable to repay, you will be fully liable as a cosigner. Death, disability or loss of work will not absolve you no matter what made them fail to repay. As long as your name appears on the loan document, the lender will come after you.

Evaluate Your Own Finances

Can I afford to help before signing up on any debt? This is important especially if you are about to retire or live on fixed income basis. In relation to these conditions, think about how you would behave if there was a possibility that some loans would default in future. It can greatly limit your ability to live comfortably when things go wrong with larger debts like mortgages. Keep in mind however that student debts cannot be wiped out through bankruptcy thus they become even more complicated.

Can You Afford to Pay Back the Loan Yourself?

Consider whether or not you are able to pay off this debt if necessary. Hopefully that will not happen but should it eventually occur, do I remain financially secure? Loans which have been secured by collateral such as home or car tend to be safer most of the time.If a mortgage fails then a bank could foreclose and sell property unlike an unsuccessful business venture or vacation idea thus consider your financial situation while going through it all.If this money is something that he/she cannot survive without then do not sign as well since this action will endanger yourself too.

Read the Fine Print

Look at it in reading any loan agreement before signing it. Can everything written here be comprehended by me? When does the loan mature? What is its repayment plan? How much interest accrues? Are there any penalties for late or missed payments? If you were to pay back the loan, what alternatives are available? Every cosigner must know the terms of the loan. This will help me to establish if this is a good deal.

Protect the Personal Relationship

Ensure that after co-signing a loan your personal relationship is protected. Don’t allow money destroy valuable connections. You can maintain good relationships by setting clear expectations and considering who you are co-signing for. Many great friendships have crumbled under financial burdens in history.It should not happen to you at all.The most important thing is having the courage to say “no” when necessary, even to someone who is close like a friend or cousin. Ultimately, it’s losing the relationship not just the money.

The Last Word

Co-signing a loan is not always catastrophic. Many parents co-sign on their children’s first vehicle, home, or credit card. Later, old children might sign for their aged parents provided they can prove that they have a lot of income and are willing to take responsibility for them.Despite needing to help family members appropriately do not make ill-advised financial decisions.

Always remember that co-signing is essentially asking for credit or taking out a loan in your own name.This will hit your credit record and may decrease your score temporarily.If the principal borrower stops paying bills then you shall be liable for paying it off in full.You will confirm it if you continue reading.If there are any problems with such an arrangement then one should take some time before making this decision again.

Ethan Johnson

Editor-in-Chief • Industry Trends Writer

Ethan analyzes market shifts and predicts future developments in different industries to keep his audience well informed and ready.