It is never easy to see a loved one going through a tough time. So when a family member or close friend asks you to co-sign on a loan, it can be a difficult decision. Even if you want to help, it is important to take time to consider all of the factors so you can make an informed choice.
Here are things to think through before you co-sign a loan:
Understand the Risks
When you co-sign on a loan, it isn’t just helping someone out. When you sign, their loan becomes your loan too. Even if you aren’t the primary person on the loan, you’re still liable for everything that happens.
So if the person you co-signed for makes late payments or misses payments, it can negatively impact your credit score. If they stop paying entirely, creditors can come to you to collect the money.
Bottom line, co-signing is taking on equal responsibility for the loan. It is a major commitment, especially for larger loans like mortgages, car loans or student loans. As a precaution, it’s good practice to make sure that you are able and willing to pay the loan in case of an emergency.
Talk Through the Details
Before you co-sign, sit down with the applicant and talk it out. Find out what the loan is for, what their repayment plan is and why they need a co-signer. It may be awkward to speak so frankly, but it’s necessary to know the details before you make your decision.
Maybe your loved one got behind on bills for a short term because of something specific, like losing a job or facing a medical issue. If the person has since turned things around and gotten back to good financial habits, it may help you establish trust.
However, if the person is simply irresponsible with bill pay and not particular about managing finances, it may not be a good fit. It is up to you to decide what you are comfortable with.
Make Sure You Can Still Reach Your Own Financial Goals
Even after you understand the risks and reasoning behind the request, there is still one important factor to consider. You should make sure that co-signing this loan will not keep you from reaching your own financial goals.
Even if the co-signed loan is paid on time each month, it can still impact you if you’re trying to apply for credit of your own. Lenders look at your full financial picture when making financing decisions. When you take on more debt, it may impact your borrowing power.
So if you know that you’re in the market for a new car, credit card or mortgage during the term of the co-signed loan, remember that it could be a contributing factor for how much you’re approved for or even if you’re approved at all.
If you are in the position to help someone without jeopardizing your own financial plans, it might be worth considering. If you think that co-signing might come with too many consequences, it could be better to skip it.
Think it through and talk to a financial professional if you need additional guidance.