Should I Co-Sign on a Loan?

Planning & Saving
on March 21, 2013

When a person applies for a loan, a financial group may ask that the applicant have a co-signer. This co-signer is equally responsible for the loan if it becomes outstanding unless released from the responsibility. This helps a person with poor credit or insufficient credit history secure funding for school, a car, or some other reason. Becoming a co-signer is a huge responsibility. If the borrower is unable to pay back the money, the co-signer has to repay the amount.

Is the Borrower Trustworthy?
Trust is a huge part of deciding whether or not to co-sign a loan. If the borrower is one’s child or family member, then it is easier to assume the debt will be repaid. However, loved ones sometimes make mistakes and cannot repay the loan, which puts the co-signer at risk. If a boyfriend or girlfriend asks for this help, one should think about what will happen in the event of a break-up or argument.

Consider the Worst-Case Scenario
No one wants to nag their friends or family members to make payments on a loan. This could severely damage a friendship or relationship. It is easier if the borrower is a close family member, but it could be harder to rebound from this mistake if the borrower is a friend or sibling. People should think about how the worst-case scenario could affect their relationship before agreeing to co-signing a loan.

Financial Situation of the Borrower
One should always know the reason for this loan and the borrower’s financial situation. It is important to have an honest discussion with the borrower about his or her income, the amount of the loan, and what will happen in a variety of situations. If there is good communication between the borrower and co-signer, then the arrangement will work out well.

If a person has borderline credit, co-signing a loan could be a huge risk and commitment. The better a person’s credit and financial situation, the less risky this situation is. If people know what they are getting into, then it is easier to make a level-headed situation. One should never feel pressured to say yes. If the situation feels wrong, it is best to say no and move on. However, if there is a lot of trust between the two parties, co-signing could work out.

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