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5 reasons to avoid co-signing for a loan

[Oct 1, 2010.]

 

Do you have a relative or friend who has asked you to co-sign for a loan? Even if that person says he or she fully intends to pay back the loan you are better off staying out of their financial business. Here are 5 reasons why you should never co-sign for a loan.

  1. When you co-sign you are agreeing to be responsible for the loan. Let's say your sister takes out a personal loan and you co-sign. She's able to make the monthly loan payments for six months, then loses her job. She no longer has an income and you are now responsible for making the payments whether you not you can afford them.
  2. Your credit rating can be damaged. When the actual borrower stops making the payments, you must take over or you will take a hit to your credit score. If neither of you pays on the loan, the lender is more likely to come after you if it appears that they have a better chance of collecting on the debt. No one wants to be harassed by bill collectors, especially for debt they aren't even responsible for accumulating.
  3. Any adult who needs a co-signer probably already has problems with their credit. Otherwise, why would that person need a co-signer in the first place? If you are seriously considering co-signing, get the lowdown on the person's financial situation first. You need to know if they have already defaulted on any loans and what type of income they have to pay back their obligation, among things.
  4. Co-signing for a teen usually means you're agreeing to pay the bills. Most teens don't have much of an income, even if they work a part-time job. It's unrealistic to expect a teen to be able to pay back a large loan. Also, if a teen who isn't that responsible misses loan payments, you may not know it until things really get out of control. Even if you want to help your teen take out a student loan, do it with the understanding that you may end up paying the bills, especially if your kid has trouble finding a job after graduation.
  5. Co-signing might ruin your relationship with your friend or family member. You may think your bonds can withstand any test, but it's not uncommon for relationships to end over disagreements about money. Do not co-sign unless you are truly OK with the possibility that your friend will welsh on the loan and stick you with the payments.

Other ways to help

If you really want to help your family member, there are ways to do that without co-signing. You could loan that person money yourself, but only do this if you are OK with the possibility of not getting that money back. Another alternative is to just give them a gift of cash if you can afford it. That way there are no strings attached and your relationship won't be put in jeopardy.

 

About Author:

Francine L. Huff is a freelance journalist and the author of The 25-Day Money Makeover for Women. She has appeared on a variety of TV and radio shows.

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