When asked to co-sign a loan, there are a number of considerations to think about before agreeing. While the safest thing to do is to decline the request, if you are going to do it, it is important to understand how co-signing a loan may affect you and how you can reduce your risks.
Can You Afford It?
A co-signer is fully obligated to the loan issuer for the loan. If the primary borrower defaults, the loan issuer is likely to pursue the co-signer for the loan as the co-signer generally has more assets and more income. When considering whether or not to co-sign a loan, you should determine whether or not you can financially cover the debt in the event that the primary borrower defaults.
Credit Concerns
When you co-sign a loan, the debt will generally show up on your credit report as well the primary borrower’s report. The new debt will likely result in a small reduction in your credit score. If the primary borrower has problems making payments on time, or worse defaults, this will cause further damage to your credit report and score. Of course, if the primary borrower makes all of the payments on time, that activity will help your credit score.
Become a Co-Owner
You can become a co-signer on a loan and not a co-owner of the property. But this only exposes you to more risk. By being both a co-signer and a co-owner, you can exert control over the property. In the case of an auto loan, you should also have a set of keys for the vehicle.
Get a Copy of the Bill
When co-singing a loan, request that the lender send you a copy of the bill each month. By doing this you can make certain that the primary borrower is making payments on time. If a problem develops, you can take action before it gets completely out of hand. In the case of an auto loan, make certain that you check the insurance on the vehicle periodically as well.
Are You Really Helping?
Many people ask a person to help them out by co-singing a loan. But is the co-signer actually helping? When a bank or other financial institution declines to loan a person, the bank has determined that the making the loan is too risky. When you co-sign a loan, you are potentially allowing a person with financial problems to acquire more debt, debt the bank believes the person may have trouble repaying. Though each situation is different, co-signing a loan for another person may actually cause more harm than good due to the burden of the newly acquired debt.