Cosigning A Loan - Is It A Good Idea?

By: Joseph Kenny

Perhaps, you're brother need someone to co-sign for a car loan, or your friend needs you to help him to get a loan for a new business venture. Either way, you find yourself with a serious decision to make: Do you co-sign a loan or not?

There is more than just signing paperwork involved. You have made a commitment to take responsibility for a loan and make sure it is paid back if the other party you co-signed for is unable to meet those requirements. This makes co-signing very serious business with definite consequences that can impact your financial circumstances. Therefore, it is important for you to decide whether co-signing is wise action.

There is a reason to wary of the idea. Many studies that were conducted to calculate the percentage of co-signed loans that ended up in default status, leaving the co-signer totally responsible for repayment show that chances are high that you will end up having to fit the bill for someone else's loan. Now, of course, statistics do not take into account your personal situations and relationship with the friend of family member. Yet, it is a disturbing figure.

Most people who may decide to cosign a loan for someone do so because that person cannot obtain loan approval based upon their own credit history or current rating. It may be that there has not been sufficient time to establish a meaningful credit or it may be matter of bad credit. Whatever the circumstance happens to be, the reason you have been asked to co-sign a loan is because you are in a better financial standing. The lender requires someone with a better credit rating to balance out the risk associated with the other party's lack of credit worthiness.

The very fact you have the better credit standing makes you the obvious target for the lender in the event the primary borrow fails to meet their loan repayment obligations. They will direct their collection efforts at you rather than the borrower since it is already a foregone conclusion that they will not get compensation from them anyway.

Possible repercussions for you as the co-signer include paying for any late fees or attorney fees associated with prosecution of claims. You may also have your wages garnished. It is not uncommon for the co-signer to lose any collateral they may have offered as security on the borrower's behalf.

Again, you need to consider what you're agreeing to when you say 'yes' to co-signing for a loan. If there is even a remote chance that the borrower will not stick to the agreement, you should back out. If this isn't the case, it may still be a good idea to have the funds available to pay off the debt if the borrower is unable to for whatever reason.

You must take these types of precautions to provide as much protection for yourself as you can. Make sure you have the terms of your responsibilities as co-signer in writing, spelling out all of the details clearly. Make sure that the lender contacts you if the borrower is late so you can plan your strategy for dealing with the situation.

Above all, do your homework about co-signing and lending policies regarding these types of situations so that you are not caught off guard by a legal situation or some other aspect of the lender's terms or conditions. Ultimately, you will have to decide if co-signing is a safe option for you. Try not to be swayed by emotions or personal appeal since this is no guarantee that you will not be stuck paying for somebody else's mistake.

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