Co-signing means you accept reponsibility for a loan

[Dec 31, 2010.]

 

Many families are pulling together during tough economic times. It's not uncommon for adult kids to move in with their parents, or vice versa. In some cases several generations of the same family have chosen to live under the same roof to pool their money. There can be many benefits to helping out loved ones during an economic crisis, but it's important to know what your limits are. For instance, co-signing for a loan may sound like a good way to help a relative, but it can end up backfiring on you.

You are responsible

There's no such thing as a passive borrower when you co-sign for a personal loan. Your cousin Bob may swear that you will never have to make a payment if you help him get a loan, but there is no guarantee his financial situation won't change. As soon as he loses his job or suffers some other loss of income, you're going to be on the hook for making the monthly payments. That's because when you co-sign a loan contract you are promising to pay back the money if the primary borrower stops making payments for any reason.

Deadbeat relatives don't repay loans

While you may love your family members and would do whatever you can to help them, that doesn't mean they all feel the same way. Let's face it. Some people are just deadbeats, and no matter what happens they are always going to find a way to get out of their financial obligations. Do not even think about co-signing for a relative who has a track record for reneging on their financial obligations. If you think this won't happen and your relative will honor their obligation, think again.

According the the Federal Trade Commission, studies of certain types of lenders show that for co-signed loans that go into default, as many as three out of four co-signers are asked to repay the loans. In many states the lender can come after you if the borrower misses only one payment.

Protect yourself if you co-sign

You may still decide to co-sign for a loan even knowing that you might be responsible for the payments. If you go through with it, get a copy of the loan documents so you'll have all the terms and conditions. It also may be possible to get the lender to agree to limit your liability to the principal on the loan. Also, ask that the lender agree to notify you if the borrower misses a payment so you can be prepared to handle it.

 

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.