Cosigning a Loan -- Know the Risks

by : loubelle

Before you consider cosigning a loan, learn about the risks and liabilities associated. Remember, that by cosigning a loan, you are guaranteeing the loan; if the borrower fails to make the payments, you will become liable for payments. After missing a number of payments, you can be required to repay the full loan balance, including late fees and penalties. If you do not pay, you are subject to legal action by the lender and serious damage to your own credit rating.

Do Not Cosign a Loan Unless YOU Are Prepared to Repay It

If a friend or relative approaches you to cosign a loan, ask yourself this question: Am I prepared to repay this loan in case of default by the other party? In most cases, the answer will be "NO!". You need to diplomatically decline the request. While it's "just a signature" you must know that statistically, more than 50% of cosigned loans end up in the hands of the cosigner.

When Cosigning a Loan Makes Sense

There are two cases when co-signing a loan may be prudent, but dictated by your level of trust, recognizing that YOU are ultimately responsible for repayment in case of default:

Your child(ren)'s educational loans or get-started personal loan. It's a good way assist your children to get approval for a loan they when they have no established credit of their own yet. Also, this places the financial responsiblity on the child, but with a safety net. It is better than simply giving them the money, and it offers a way for them to establish good credit in their own names.
Your spouse or partner may benefit from your cosigning a loan for starting a new business, expanding their business, etc., when your good credit or income may improve the chances of getting loan approval.

Before Cosigning a Loan:

- Make sure you can afford to repay the loan in case of default by the borrower.

- If it is a "secured" loan, you are pledging your assets as collateral against nonpayment. Make sure you are aware of the terms, conditions and consequences.

- Negotiate terms that make you liable only for the principal amount of the loan, not including fees and penalties.

- Insist on a clause the requires the lender to contact you immediately of late payments or missed payments so you may intervene before a full repayment is required.