Should you co-sign a loan? – Advisor Forbes INDIA

0

Co-signing a loan may seem like a good idea because it splits the obligation to repay it. It is quite common to co-sign with family members and relatives or parents or adult children or some even go quite far to co-sign for friends. However, co-signing can only be useful if you have the “right” reasons to proceed.

Here’s what you need to know before co-signing a loan.

Your role as a co-signer

When you co-sign, you assume ownership or responsibility for that loan – it becomes your loan. You are not just a witness who signs a document. By co-signing, you assume full responsibility for this loan. When you co-sign a loan, you become a guarantor and agree to voluntarily pay or repay the borrower’s debt.

You may be approached to be a co-signer because the borrower is denied a loan for reasons ranging from lack of credit history, low credit score, or extremely high interest rates. Before making a decision, you must remember that it is not always advantageous to be a co-signer. Some perils awaiting you include:

  • Your credit report can take a hit and your credit rating can be affected if your borrower doesn’t keep their payments.
  • When you co-sign a loan, the lender exercises its right to approach you before the borrower to collect the dues.
  • You can be stuck with the loan if the borrower defaults on the loan. This can be worse if you, as a co-signer, have mortgaged your assets, such as property or a vehicle, to secure the loan.
  • You could end up not only paying the full dues, but also having to pay late fees or fines, or collection charges, if applicable. You could be sued if the loan is not repaid.

What you need to know before co-signing a loan

  1. Pay attention to details like who is asking you to be a co-signer. If the borrower is a young student, or your child, who has not yet established a credit history, this is not alarming.
  2. If the borrower is an adult with a history of poor financial decisions, you may want to reconsider your decision.
  3. You may want to consider the amount – the lower the better and an amount that doesn’t overshadow the next phase of your life.
  4. You need to remember that your credit report will be impacted and it will show up in your credit report.
  5. If your relationship with the borrower deteriorates for any reason, you are still legally responsible for repaying the loan.
  6. If you co-sign, you are bound to it for the duration of this loan.
  7. You may want to consider legal action when your main borrower is in default and you need to start repaying their debts, which if you fail to foreclose or collect, you could be sued by the lender. In such a case, you could sue your primary borrower as your only recourse for your significant financial losses.

How can you protect yourself as a co-signer?

Talk to your borrower

Before signing on the dotted line, be sure to discuss with your borrower all the obligations of co-signing the loan: deadlines, punctuality, pros and cons affecting your relationship with the primary borrower and your financial situation. . Bring everything to the table to barely discuss so both parties know what you’re getting into.

Access to all online accounts

You must have access to all online loan accounts. This way, you can keep an eye on the regularity with which the borrower pays their dues and their payment history.

Marked on all correspondence

Whether by email or post, make sure you are flagged for all correspondence so you know the health of the account.

Funds needed as an emergency fund

You are legally obligated or required to repay the loan. So if you’re a co-signer, you might as well bolster your emergency funds.

A firm deadline

When co-signing, you can choose to opt for a balloon mortgage which relieves you of the long period that keeps you tied to the mortgage. Instead, you can insist that the borrower take out a balloon mortgage, which ends sooner.

You can also ask for a termination clause to be part of your agreement.

Options available if you do not wish to co-sign

Give money if you can

The risks, the legal hassles, the risks to your credit records are all far less than becoming a co-signer.

Loan the full amount yourself

Nobody stopped you from becoming a lender. All you need to do is attach a lien against the collateral you are risking it with. Be prepared to take legal action if they don’t repay the loan.

Offer a guarantee instead of agreeing to be a co-signer

If the loan is of a more modest nature, for example, for a vehicle, you can choose to lend your old and used vehicle to them as collateral instead of letting them take out a loan with you as a co-signer. So even if they default, in the worst case, you lose a vehicle, but you still don’t lose your credit rating.

Conclusion

One thing to remember is that co-signing should not be taken too casually. For someone else reaping the benefits of a loan, you could potentially lose if you agree. Consider all the pros and cons before agreeing to co-sign a loan.

Share.

Comments are closed.