Being a Co-signer on a Personal Loan
Being a co-signer on a personal loan for a
friend or family member is a very generous offer as it will likely mean the
difference between them being able to qualify for such a loan and not being
eligible. However, the decision of being a co-signer for a personal loan should
not be made lighter. It is the responsibility of potential co-signers to
educate themselves about how this situation affects them, especially with
regard to their responsibility to the loan should the borrower default.
Most co-signers don’t realize that this
loan is going to show up on their credit report. Keep in mind that this might
affect your ability to get your own loan down the road as the personal loan you
co-signed on with by used to calculate your debt to income ratio. It can also
affect the interest rate you get your own loans at. If you feel it is a good
idea to co-sign a personal loan for a friend or family member, do so with the
understanding that after a set amount of making on time payments the borrower
will attempt to redo the loan under their own name only. The more money you
co-sign for, the longer you can expect to be a part of that loan.
Since the loan can both positively and
negatively impact the credit rating of the co-signer it is important to set the
loan up so that they co-signer can access the account information. This will
allow you to find out what has been paid on the loan and what is still owed.
Make sure the lender will inform you of any late payments or non-payment issues
with the borrower as soon as they happen. Too often co-signers aren’t aware
there was an issue with the loan until it has already impacted their credit.
While co-signing a loan for a friend or
family member can help them, be aware of how it will affect not only your
credit but your relationship as well. Nothing can sour relationships faster
than money issues. It is important for a co-signer to look at the circumstances
that lead to the individual needing one in the first place. If it comes down to
simple money mismanagement, then you aren’t doing them or yourself any favors.
However, it is the result of circumstances they had no control over you may
want to consider it.
To minimize your risk as a co-signer, don’t
make it habit of offering to do so for friends and family. The word will spread
like wildfire with more requests heading your direction. If you don’t feel your
own credit and finances can’t hold up if the borrower doesn’t repay the loan,
then do not co-sign for a personal loan. It can be difficult to say no, but it
is important you are able to.
You might consider having the borrower
provide your with verification that payments are being made including regular
statements or cancelled checks. To further reduce your risk as a co-signer
insist the borrower purchases personal loan insurance that can cover loan
payments for a particular amount of time due to unemployment, illness, or
death.
Co-signing a personal loan for someone is
more than giving your signature. You are putting your financial history and
worthiness on the line for that person. It is important that you carefully
review the borrowers need for the money as well as their spending patterns. If
they owe other people money or continually live beyond their means, walk away
with a clear conscious. There are times that being a co-signer on a personal
loan is the right thing to do. Only you can make that decision. If you decide
to go forward with it make sure you can afford the cost of any missed payments
and that the lender is going to keep you informed on the payment status on the
personal loan.
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