Think Twice before You Co-Sign on That Personal Loan

Often, parents end up co-signing on debts for their children to help them get their credit established, etc., but that isn’t always such a good idea with personal loans. Sure, it is a nice gesture, and shows that you really care and have trust in the person you are co- signing for, but what happens if that person isn’t able to repay that debt? Are you financially able to take care of it, or would you have to struggle to make ends meet? Sure, you want to think that your child or friend wouldn’t put you into that position, but we never know what the future holds. If they get sick, lose their job, or get married, they could decide that they just can’t afford to pay this debt anymore, and in which case, the lender will come to you for payment.

You can’t just decide not to make the payments on a personal loan that you have co- signed on, in the event the signer goes into default. Your own credit will be impacted every time a payment is missed, not just the credit of the signer. Many people don’t realize this. Not only that, but if you need to take out your own loan, this loan will impact the amount of money you are eligible to receive, as it will be counted in with your monthly debts. Even though you may not be the person making the monthly payments, because the loan is on your credit, the payments will be counted when determining your eligibility for your own loan. If you still decide to co-sign on a personal loan, make certain that you have a contract with the other borrower, stating not only that they will make the payments, but that after a certain amount of time, they have to refinance the loan in their own name, relinquishing you from the loan, freeing up your credit if you should need to use it.

You should make certain that you stay on top of the loan as well. Have the statements sent to you, and request that you be notified the day a payment is missed, so that you can take control of the situation. If you don’t specify this with the lender, and take steps on your own to make certain the obligation is being met, the loan could go three or four payments past due before you are ever contacted, at which point, your credit has already been severely impacted.

Think about what will happen to your relationship with the borrower if they allow the loan to default. If your own credit is ruined by trying to help someone else, will you resent that person, or carry on your relationship as normal? Too many relationships are damaged by this type of situation, so it is important to step back and think about that before agreeing to co-sign on someone else’s personal loan.

Don’t routinely co-sign for family members and friends. If you sign for one family member, and they let someone else know, pretty soon, you will have a string of people at your door asking for your help. You don’t want to say no and jeopardize your relationship, but you don’t want to risk your credit either, so you could end up in a difficult situation. Make certain that you never co-sign on a personal loan that you can’t afford to pay back, just in case the unexpected does occur.

Along with making certain that you stay on top of the loan, let the other party know that you want proof each month that the payments have been made, such as receipts from the lender, etc. Also, when the initial paperwork is drawn up, make certain that the loan is covered by insurance, so that in the case of illness, or lose of work, the payments will still be taken care of. There is an extra charge for this insurance, but if you are co-signing on a personal loan, it shouldn’t be something that you compromise on.

By co-signing on a personal loan, you are basically saying that if that person doesn’t take care of their debt, you will. If you aren’t prepared or willing to do this, then you need to be firm and say no. It is your decision to make, but co-signing is risky, even under the best circumstances.