6 Things to Consider Before Co-Signing a Loan

6 Things to Consider Before Co-Signing a Loan
If you’re thinking about co-signing a loan, you should know that you’re doing a lot more than just offering a favor to a friend or family member. You’re putting your own good name on the line as well.

Here are 6 things to consider before co-signing a loan.

1. What Are the Terms?

When you co-sign a loan, you should know just as much about the loan as if you were taking on the loan yourself. What is the amount of the loan? When is it fully due? Is there a balloon payment involved? What is the APR? Is there collateral involved as with title loans?

Those are all key considerations that you would evaluate when considering getting a loan yourself. You should practice the same level of due diligence when co-signing for a loan as well.

2. How Well Do You Know the Borrower?

The borrower in this case might be your best friend or a beloved family member, but if you know the person’s financial habits well enough to know that it’s not likely that he or she will pay back the money, then you’re doing yourself a disservice by agreeing to cosign the loan.

3. Who’s Setting the Rules?

If there’s some flexibility in the terms of the loan, then you should know who’s making the final call. If you’re willing to co-sign the loan, that person should be you.

You might feel more comfortable if the borrower is forced to pay back the loan quickly at a lower interest rate as opposed to taking a longer time with a higher interest rate. If so, then set the rule accordingly or refuse to co-sign the loan.

4. Have You Talked Openly About the Agreement?

Sometimes, there are ways to get money without going through the formal process of taking out a loan. Have you and the borrower considered alternatives? Have you discussed other options?

Also, take some time to discuss what co-signing will do to your relationship. You don’t want to lose a friend or alienate a family member over money, after all.

5. Can You Afford the Payments?

Once you co-sign on the dotted line, you’ve committed yourself to the loan. There’s no going back once you’ve gone there.

That means if the borrower doesn’t pay back the money, your credit takes a hit too. You’ll be reported as someone delinquent in payment to all the credit bureaus.

Is that really what you want?

Yes, you can keep your credit in good shape by taking up the payments when the borrower doesn’t, but then you take a financial hit. That’s something you definitely want to consider.

6. It’s Risk Without Reward

In finance, people usually take risks to earn a financial reward. When you co-sign a loan, you’re assuming some level of risk with no reward except possibly the gratitude of a friend or family member.

You’re a Good Samaritan for wanting to co-sign a loan. However, you should be aware of what you’re getting into before you do it.

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