Should You Cosign a Loan?
Has anyone ever asked you to cosign a loan with them? Cosigning a loan means you are giving the lender a guarantee that full amount of the debt will be paid by you if the original borrower doesn't pay.The lender asks for a cosigner on a loan because the borrower does not meet their loan guidelines. In other words, the lender feels the loan is too risky for the borrower on their own and wants a cosigner to assume that risk as a safety net.
That can put additional pressure on you to cosign because the borrower knows the loan will be turned down unless you agree.
Most often a parent might be a cosigner on a loan to help a child get a first loan or a relative or close friend may need financial help. No matter what the reason is, if you decide to accept this responsibility here are a few things to consider.
You must consider the worst case scenario first to make sure you have the ability to pay the full amount of the debt. You are liable for the total loan amount and that means your assets and even your credit score could be affected if you can't pay.
Depending on the state, creditors have many different ways in collecting the debt. Some states allow the creditor to collect the debt from you without first trying to collect from the borrower.
While other state laws forbid a creditor from collecting from a cosigner without first trying to collect from the original borrower. In addition, you may also be asked to pay late charges or even attorney fees if the lender sues to collect.
Also your liability for cosigning a loan may keep you from getting other credit because a creditor considers the cosigned loan as one of your obligations.
If you use your car to secure a loan, make sure you realize what the consequences could be. If the borrower defaults, you are putting your car at risk and could lose it.
Sometimes you may even offer property you own or your home to secure debt on a cosign loan. Think carefully if you are risking the home you live in because the consequences are high.
A good tip if you do cosign for any loan is ask the lender to agree, in writing, to notify you if the borrower misses a payment. That allows you enough time to make back payments if the original borrower has problems.
Get copies of any loan documents and contracts even if you have to make copies from the borrower's copies. If there is any dispute between the lender and borrower these will become valuable.
Use your good common sense and weigh all of the risks before you cosign any loan.
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