Before helping out a friend or family member by co-signing a loan, it’s important to understand what it means for your own financial health. When you co-sign for a loan, you basically tell the lender that you accept equal responsibility for the loan’s repayment. You’re guaranteeing that if the borrower fails to pay, you’ll make the payment! Studies have shown that as many as three out of four co-signers (75%) ultimately end up making payments on the loan.
If you’re considering co-signing a loan for a friend or a relative, please remember these tips:
- Know the person you’re attempting to help. Before agreeing to sign on the dotted line, study the person’s financial habits and make sure you’re comfortable with his or her money management skills.
- Verify that person’s employment and take home pay by reviewing paycheck stubs and bank statements. If the borrower doesn’t want to share that type of personal information, he shouldn’t be asking you to put your credit-worthiness in jeopardy.
- Understand your own capability. Make sure you have enough income left over each month to pay the minimum payment on this account should something occur unexpectedly.
So what do you do if you have co-signed on a loan and the borrower defaults?
- If the lender decides to sue and wins, your wages can be garnished or liens and judgments can be placed against your personal property until the debt is satisfied.
- Your credit report can be severely tarnished from several months of late payments, as well as a judgment against you.
- You may eventually have to pay the full amount of the debt in addition to late fees or other collection costs.
Listen, your credit is vital to your own long-term financial success. Think about the reason this person can’t qualify for a loan on his or her own before you move forward. There’s good cause for why the bank isn’t willing to take on that risk. And maybe you shouldn’t either.
If you feel uncertain about one or more of the above points, seriously reconsider co-signing and focus on rebuilding or even maintaining your own credit using my 7-step process in Real Credit Answers. It’s a step-by-step guide that’ll help you reach your credit score goals and regain control of your own financial life.