When you co-sign a loan, you take on enormous financial responsibility. Of course, the primary borrower is theoretically supposed to be the person paying off the loan, but you promise the creditor that you will be liable if they don’t. If the borrower is behind on their payments or defaults, your credit will be damaged and creditors will try to get the money back from you.
In certain circumstances, you may decide to say yes to co-signing despite the risks. But if you’re thinking about sharing the responsibility for someone else’s loan, be sure to ask these questions first.
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1. Why do you need to borrow?
It can seem intrusive to ask someone why they need money. But if you are going to guarantee them a loan by co-signing, you deserve to know why they are asking you to take this big risk.
Their reasons for borrowing can also help you decide if you want to put your credit score and your money on the line to help them. After all, there’s a big difference between cosigning for a personal loan for your child so they can get fertility treatment or pursuing a career change – and cosigning for a friend so they can pay for a big vacation. .
2. What is your plan for paying off the loan?
When you co-sign, you need to be sure that the primary borrower will pay off the loan in full, or you’ll end up with the bill. For this reason, it is important to know what their plan is to find the money.
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If they already have a good job with a steady income and room in their budget to pay off their debts, chances are they will make the payments on time and in full. On the other hand, if they only have a vague goal of getting a better job after borrowing, but no concrete idea of how they are going to do it, you can proceed with caution.
3. How will you pay if your income is reduced?
Unfortunately, for most people, there is always a risk that a reduction in hours or a job loss will result in a drop in their income. You need to know what the main borrower’s plans are if this happens.
If they set up an emergency fund or a spouse’s salary that they could rely on temporarily, they could probably still repay the loan if there are any obstacles in the way. And that probably means less risk for you.
4. When will the debt be fully repaid?
The longer the loan repayment period, the heavier the co-signing becomes. There are two reasons for this.
First, the repayment problems are more likely to develop over a very long period of time than over a short period. After all, if it takes 10 years to pay off the debt, it is much longer for illness, job loss, or other unforeseen events to arise and cause problems than if the loan repayment takes. only two years.
Second, the whole time that you co-sign, the debt shows up on your credit report. This means that your own ability to borrow could be affected if your debt-to-income ratio is too high, even though everything is going well and payments are made on time.
If the primary borrower has a good reason for taking the loan, you are confident in their ability to pay, and the debt will be paid off in no time, then you can decide to say yes to the co-signing. Remember, even under the best of circumstances, you are still taking a big risk – so make sure that if the person you co-sign defaults on the loan, it won’t be financially devastating for you.
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