At some point a friend or family member may come to you and ask you to co-sign a loan for them. This is something that you need to think hard about, co-signing a loan is a serious business. There are very real consequences for you as the co-signer if the borrow fails to make his payments. It is vitally important that you do your research before you co-sign a loan for anybody.
One vitally important thing that you have to keep in mind before you consider co-signing a loan is that the loan will show up on your credit report. This may make it difficult to get a loan yourself since one of the things that lenders look at in assessing your loan application is how much debt you already have, and a co-signed loan will count as part of your debt. If you believe that you will need to get a loan yourself in the near future it is probably not a good idea to co-sign a loan.
It is also important that you make sure you stay on top of the loan and make sure that payments are being made. Make sure you have access to the account information and make sure that you are informed about any late or missed payments. Remember this will affect your credit rating, don’t let your own credit get ruined because someone else missed their payments and didn’t tell you about it.
It is usually a good idea to try to limit the amount of time that you are the co-signer of the loan. After the borrower has made a few on time payments he should be able to rework the loan an no longer need you as the co-signer. Try to get this done as soon as possible, keeping in mind the larger the loan is the longer this will take. You also may want to have the borrower get personal loan insurance to cover you if he loses his job or has an accident.
Think long and hard about who you agree to co-sign a loan for. Think especially about why they need a co-signer. It’s one thing if they need one because they have no credit history, but if they have poor credit because of a history of missing payments it’s probably not a good idea to co-sign a loan for them. Most people who co-sign loans do it for family members and this can be a real source of trouble. Nothing can ruin a relationship like a dispute over money. If you are going to co-sign a loan for a family member you need to think about it as a business arrangement and make sure you take all necessary precautions to protect yourself.