If your family member or friend comes to you asking that you cosign a loan for them, give this question a hard thought before saying “Yes.” There is more to it than just putting your signature on the borrower’s loan documents. It may be hard to say no to a friend or relative when they are in dire need of a cosigner, but many cosigners later wish they had the courage to say it. According to a survey by creditcards.com, almost 40% of cosigners find themselves paying for other people's loans because the primary borrower has defaulted.1
However, cosigning doesn’t always end badly. Here are five crucial questions to ask yourself before putting pen to paper – if you want things to end well.
1. What Exactly Is Cosigning for a Loan?
You must first understand the basics of cosigning to be on the right path. When you cosign a loan, it means that you are guaranteeing someone else’s debt and you will be required to pay if the borrower fails to make the payments. It doesn’t matter whether you benefited from the loan or not – basically, it’s your loan. You need to be sure that you can afford to pay the debt if you are required to, which could be the full amount if the borrower is not able to pay a cent. It’s also good to note that if the debt is in default; your credit score may be affected. And, as you probably already know, your credit score can affect your ability to get and maintain a security clearance.
2. Who Is the Borrower to You and What’s the Loan’s Purpose?
It is imperative to scrutinize your relationship with the borrower and determine what they are planning to do with the loan before co-signing on it. Is he or she a student looking for college education fees? Is it a friend who wants to buy a car or apartment? Do they want to start a business?
In all cases, it is possible that unforeseen circumstances could arise and make it impossible for the borrower to repay their loan. A student could drop out, or finish their education and fail to get a job, leaving you with thousands of dollars worth of debt. Your friends' business could fail to pick up and make them miss payments. There are so many scenarios that could lead to a borrower failing to make a payment...So, cosign only when you can afford to take on the entirety of the debt.
3. Why Does the Borrower Need a Cosigner?
You are entitled to ask as many questions as desired about why the borrower needs a cosigner. You need to understand his or her financial history and behavior thoroughly before agreeing to anything. Find out the level of discipline in making timely payments, managing finances, and maintaining a healthy credit score. Also make sure to ask about employment history and current financial status (income, expenses, credit, etc.) That may be an uncomfortable conversation to have, but it’s crucial that you know his or her finances well before taking any risks.
4. Will You Be Able to Reach Your Other Financial Goals While Cosigned to the Debt?
If you are planning on applying for credit yourself or refinancing your home in the near future, it would be best that you don’t cosign any loans now. In the eyes of a lender, a loan that you have cosigned is part of your debt, and will count as part of your total debt load. This could limit the amount of credit you can qualify for when you need it.
5. What Would Happen to the Relationship With Your Cosigner If Default Occurs?
According to Forbes, 26 percent of individuals who cosigned loans ended up in rocky relationships after the primary borrowers defaulted.2 As mentioned earlier, cases of default are rampant – with around four in every 10 people defaulting and leaving the debt burden to cosigners – and hence it’s important to decide if you are ready to risk your relationship with a friend or relative if they fail to pay.
If you are thinking of cosigning for someone, make sure both of you understand the process in detail to safeguard your finances.
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This content is developed from sources believed to be providing accurate information, and provided by Twenty Over Ten. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.