Cosigning a Loan

Almost everyone believes in supporting the people they love during times of need. Sometimes, however, offering a helping hand can mean going out on a limb, especially when you’ve been asked to cosign a loan. Cosigning a loan is often the only way someone with bad credit or no credit history at all can get the financing they need to purchase an automobile, furniture, or other product. And in some cases, such as if a son or daughter with no credit background wants to buy their first car, it can be a valuable credit tool.

However, offering a co-signature involves certain risks because, if the borrower is unable to pay back the debt, the responsibility for the balance goes to the cosigner. In fact, in most states, if you cosign a loan and the borrower misses a payment, the lender can collect from you immediately, without pursuing the borrower first.

Before agreeing to cosign a loan, ask yourself if you can fit the monthly payments into your budget. If the borrower defaults, the creditor will require payment from you, and it can damage your credit rating if you cannot make the payments. Furthermore, you may be responsible for any late fees or collection costs, which increases your liability.

Remember that, even if all goes well and the borrower fulfills the obligation, your liability for the active loan may prevent you from getting approved for other credit, because it will be included on your list of debts. Above all else, never offer your own property to secure someone else loan without carefully considering the possibility of losing that property if the borrower defaults.

Should you decide to cosign a loan, protect yourself by asking the lender to calculate the precise amount of money you might owe? They are not required to do this, but many will if asked.

You may be able to negotiate specific terms for your obligation, such as limiting your liability to the principal balance only. If the lender agrees, have a statement entered into the contract that says, “The cosigner will be responsible only for the principal balance on this loan at time of default.”

Another way to protect yourself is to ask the lender to notify you in writing if the borrower misses a payment. This official warning will alert you to any problems before they get out of hand. It also gives you the opportunity to make the late payments without having to pay the entire balance immediately.

By taking these simple steps, and exercising your own good judgment, you may be able to help someone in need without suffering financial consequences in the end.