If you are looking to co-sign a loan with a family member or loved one, you should be aware that you may be held financially responsible in case the co-signer defaults on the loan, or can not make payments.
Go with your instinct
If your gut tells you that you son or daughter, or a friend or another family member, is not great with money, don’t co-sign the debt.
It’s as simple as that.
If your son has recently graduated, and searching for his ideal career, but thinks that getting a $30,000 car loan will really help him, this probably isn’t the time to co-sign.
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Know the facts before you sign
When you co-sign on any debt, whether it be a car loan or credit card, you will be held responsible if the other party can not pay back the debt.
If for some reason the other party dies, you will also be responsible for the full balance of the debt.
Co-signing can lead to risk without reward.
About thirty percent of co-signers end up getting stuck repaying the debt.
In addition, the co-signed loan will make up part of your credit score.
If you co-sign a loan, your debt-to-income ratio is affected, which can make borrowing for yourself more difficult.
Facts after signing
However, if you do decide to co-sign on debt, you have the right to receive information about the debt.
The lender can provide you monthly statements, and copies of the credit agreement.
Each month, make sure you review the statements to keep track of whether the debt is being paid back at the appropriate rate.
Also, if it a credit card you have co-signed on, review what is being purchased.
If you notice that the number of things that are going on the card is increasing each month, you may want to discuss this with the other co-signer to see if they are struggling financially.
You may feel a little awkward doing this, but it will affect your credit, and the loan will default to you if they can not make payments.
In the terms, outline with the creditor to make sure you are contacted if the borrower misses a payment.
Also, ensure you have copies of all the loan documents and terms, even if you are fully confident that the borrower will make all payments back.
If the borrower does make each payment, your credit score may actually be positively affected by the debt.
If you’ve been approached by a family member seeking a co-signer on debt, make sure you would be able to pay back the loan in full, and continue to make payments on the debt should the other co-signer be unable to.
The bottom line is that you will be held responsible for any debt that you co-sign on that the borrower is not able to settle.
Remember that while you may want to help out a family member, you need to remember that your finances need to come first.