Why co Signing a Loan is Risky Business

At some point in your life a family or friend may ask you to cosign a loan for them so they can be approved for a credit line. A lender asking a borrower for a cosigner to a loan, especially ones of substantial amount, is not an uncommon occurrence.

Chances are if a person you know is asking, it is because he/she is having difficulty getting credit on his/her own and need someone else with good credit to basically vouch for the loan so the lender will approve the transaction.

If you are considering yes to this request, it is a good idea to first consider the risks of cosigning a loan because if your family member or friend fails to make payments, this could have serious consequences for you.

Here are a few of the top reasons why cosigning a loan is risky business:

• Impact your own credit score

Adding a loan to that you’ve agreed to cosign for can impact your credit score if the loan goes into default. In some instances you may be requested to pay the loan, but even if you aren’t, this could cause considerable damage to your own credit rating and prevent you from obtaining credit in the future.

If a loan that was not paid is listed on your credit report, this will reflect negatively on you because the credit obligation was defaulted on.

• Be held responsible for loan

In some instances if the loan was not paid by the person you cosigned for, the lender may turn around and ask you to pay their financial obligation.

Unless you are willing and able to assume responsibility for the loan you cosigned, you may want to think twice before agreeing to put your John Hancock on the dotted line of the loan.

• Consequences if you can’t cover the loan

In the event the primary person listed on the loan doesn’t meet their payment commitment and ends up not paying their loan, there is a good probability the lender will turn to the cosigner of the loan to get their payments.

If you cannot afford to make these payments, according to the FTC you could be sued for repayment and as a result damage your credit ratings, which as indicated above, can cause you future problems with your own financial dealings.

• Consider collateral

Some lenders may ask for collateral to secure a loan as a guarantee of payment if the primary borrower defaults. Consider the property you are willing to risk before agreeing to this arrangement where you are a cosigner.

Agreeing to cosign for a loan can be risky business. Before agreeing to such an understanding, it is a good idea to consider who is asking and your relationship with the borrower. If it is your child or other close family member trying to establish credit, you may have a strong urge to want to help them launch their credit rating, and this could work out fine.

On the other hand if it is someone who has a repeatedly poor history with credit, or someone you don’t know as well, this may be a much bigger risk. Often people who have run into credit issues before tend to make repeat mistakes. Weigh this out carefully before agreeing to cosign. A cosigner is not just about helping someone get a loan, it is also assuming responsibility if the loan is not repaid.

For additional tips and things to think about when considering acting as a cosigner, visit the Federal Trade Commission’s website for more information and details.