Getting asked to co-sign a personal loan for a friend or family member? If you agree to do it, this is a very generous gesture as it will likely mean the difference between them qualifying or not being eligible. However, the decision of being a co-signer for a personal loan should not be taken lightly. As a potential co-signer on a loan it is your responsibility to educate yourself about how it could affect you and your own credit rating should the borrower default on their loan.
First and foremost, be aware that this loan is going to show up on YOUR credit report. Keep in mind that this will affect your credit rating because the personal loan you co-sign on will be used to calculate your debt to income ratio which influences the interest rates you are eligible for. If you feel it is a good idea to co-sign a personal loan for a friend or family member, do so but make it absolutely clear that after making on time payments for a year or so the borrower will need to reapply for the loan under their own name. With this in mind be aware that the more money you co-sign for, the longer you can expect to be a part of that loan.
As the co-signer, you will want to have access to the account information. You will want to keep abreast of the balance and payment history. Also contact the lender and make an agreement that they inform you of any late or missed payments as soon as they happen. You do not want to be caught unaware and find out that your credit has been ruined after the fact.
Co-signing a loan for a friend or family member is a grand gesture and will surely be appreciated if it all goes smoothly however, know that nothing can ruin a relationship faster than a money issue. You should pay close attention to the circumstances that lead the individual to needing a co-signer in the first place. If it is a matter of poor money management, then you won’t be doing anyone any favors, yourself included. However, if you are helping them to establish an initial credit history or if their financial situation is the result of circumstances they had no control over, you may well be doing them a favor that will provide lifelong benefits.
Minimize your risk, don’t make a habit of co-signing loans for friends and family. Next thing you know there will be a line at your door of folks looking for help with their financial situations. By all means, do not jeopardize yourself by being the martyr who knows their credit and finances won’t hold when the borrower doesn’t repay the loan, but co-signs anyways due to pity or false hope. It can be difficult to say no, but in this situation if you agree you will both regret it.
You might consider having the borrower send regular statements or canceled checks or some other kind of verification that payments are being made. You could even go as far as insisting the borrower purchase personal loan insurance that could cover loan payments for a particular amount of time in case of unemployment, illness, or death.
Co-signing a personal loan for someone means more than signing a piece of paper. You are putting your financial history and worthiness on the line for that person. It is important that you review the borrowers need for the money as well as their spending patterns very carefully. If they owe other people money or continually live beyond their means, walk away with a clear conscious. There are times that being a co-signer on a personal loan is the right thing to do. Only you can make that decision. If you decide to go forward with it make sure you can afford the cost of any missed payments and that the lender is going to keep you informed on the payment status on the personal loan.
