Cosigning Loans - Should I cosign a loan?

To Cosign or Not - Learn The Facts Before You Sign

By Sharon Secor

Direct Lending Solutions Staff Writer

Accurate information is an essential part of any smart financial decision, and that is especially true when you are choosing whether or not to cosign a loan. Cosigning a loan involves fiscal obligations and risks that you should understand thoroughly before you put your signature on the agreement.

The bottom line of cosigning a loan is pretty simple to understand. If the person who is getting the actual benefit from the agreement – the loan – defaults on the repayment plan, then the cosigner is liable for the money.

Typically, it is a person with a bad or insufficient credit rating that needs a cosigner for a loan. Another circumstance in which a cosigner could be required is if the debt to income ratio is not within the desirable range, making it seem as though the borrower will struggle a bit to make the payments. A good example is a monthly home mortgage payment that is of an amount significantly greater than the average percentage of income that is typically suggested to be spent on housing.

It is your better credit rating that makes you eligible to cosign a loan. If you are considering cosigning a loan for someone, you must bear in mind that it is also your credit rating that is on the line. If the person receiving the loan defaults and you are unable to take financial responsibility for the loan, failing to repay it in a timely fashion, your credit standing will be damaged.

In fact, not only could you stand to lose that better credit rating, but also – depending upon the amount of the loan and your ability to pay it back in the event of a default on the part of the borrower – your home. That is because if the borrower defaults and you are not in the financial position to be able to repay the loan, the lender has the right – thanks to your signature on the loan – to take legal action against you to collect, even forcing the sale of your home if the amount to be collected is great enough.

Often the request to cosign a loan has an emotional component to it. After all, it is not typically a thing a stranger would ask you to do. It is frequently this emotional factor that gets people into trouble cosigning a loan. It is natural to want to do things for people we car about. However, it is important not to let emotions reign when it comes to making financial decisions.

Before cosigning a loan, you need to look at all the factors involved, as well as understand fully the obligations that you are committing yourself to. After considering the way such an agreement may affect you and whether or not you are willing and able to repay the loan if need be, you may want to think about whether or not cosigning that loan and helping someone you care about take on more debt than may be best for them is really the right thing to do.

There are times when cosigning a loan may not really, in the long run, be a help at all, as it doesn’t encourage such sound financial practices as saving for what one wants, fiscal responsibility and living within one’s own means. However, there can also be cases in which it may be a useful service. Cosigning is serious business, and should not be taken lightly.

If you have cosigned a loan and find yourself in the position of having to be responsible for it, you do still have options. While not paying it at all really isn’t a good option, as it will harm your own credit and may even cause you to lose assets through a judgment, if you find yourself struggling, often creditors are willing to negotiate. Because when a loan is in trouble, the primary concern is getting back the principal, or at least as much of it as possible, you may be able to get a reduction or even elimination of the interest rates. Some creditors, in order to get back at least a significant portion of the loan are willing to take a percentage of every dollar owed, rather than the full amount.

Think long and hard before cosigning a loan. Make sure you have all the facts and completely understand your risks and obligations. Once you’ve done that, you may want to consider whether or not the cosigning of the loan is the best way, in the long-term, that you can be helpful to the borrower and how it will affect your relationship in the future. When you do these things prior to cosigning or not, you help to preserve the health of both your finances and the relationship you have with the borrower.

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