Things to Consider Before Cosigning a Loan

Many of us will be asked by a friend or family member to cosign a loan for one reason or another. There are many reasons why a borrower needs a cosigner, but most often the reasons revolve around the individual’s credit. In some cases, a young person may have no credit history of his or her own, and such a young person may ask a parent or other responsible adult to cosign the loan. In other cases, the individual may have damaged his or her credit to the point where the lender refuses to provide the loan without the additional guarantee of a cosigner.

It is important for every potential cosigner to understand the obligations that come along with that signature. When you cosign a loan you are essentially promising to pay if the primary borrower defaults on the loan. It is vital to understand this basic fact, and to understand that if the borrower needs a cosigner, he or she is not a good credit risk.

Cosigning a loan makes you financially responsible, so it is important to understand the risks, and to make the decision based on those risks, rather than relying on emotion, or feeling sorry for the person involved.

If the primary borrower defaults on the loan, the cosigner must be ready, and able to take over and pay the loan. Failing to do so could damage their credit and cause lots of problems down the road.

There are of course valid reasons for acting as a cosigner on a loan, and in many cases these cosigning relationships work out quite well. For instance, in many cases a parent will act as a cosigner on their son or daughter’s first car, or on a college loan, in order to give their offspring the good start they need. It is just important to go into the transaction with your eyes wide open, and to understand fully the responsibilities that come with the loan.



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